Deep Habits

Morten Ravn, Martín Uribe () and Schmitt-Grohé, Stephanie
Authors registered in the RePEc Author Service: Stephanie Schmitt-Grohe

No 4269, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper generalizes the standard habit formation model to an environment in which agents form habits over individual varieties of goods as opposed to over a composite consumption good. We refer to this preference specification as ?deep habit formation?. Under deep habits, the demand function faced by individual producers depends on past sales. This feature is typically assumed ad-hoc in customer market and brand switching cost models. A central result of the Paper is that deep habits give rise to counter cyclical mark-ups, which is in line with the empirical evidence. This result is important because ad-hoc formulations of customer-market and switching-cost models have been criticized for implying pro-cyclical and hence counterfactual mark-up movements. The Paper also provides econometric estimates of the parameters pertaining to the deep habit model.

Keywords: Habit formation; Customer market models; Switching cost models; Time varying mark-ups; Business cycles (search for similar items in EconPapers)
JEL-codes: D10 D12 D42 E30 (search for similar items in EconPapers)
Date: 2004-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (57)

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Related works:
Journal Article: Deep Habits (2006)
Working Paper: Deep Habits (2004)
Working Paper: Deep Habits (2004)
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