Internal habits formation and optimality

Mauro Bambi and Fausto Gozzi

Journal of Mathematical Economics, 2020, vol. 91, issue C, 165-172

Abstract: In a very influential model with internal habits, Carroll et al., (2017, 2000), establish that an increase in economic growth may cause a positive change in savings. The optimality of this result, and of many other contributions using a similar framework, has been questioned by some authors who have observed that the parametrization used in these models always implies a utility function not jointly concave in consumption and habits. In this paper, we revisit the optimality issue and, using advanced techniques in Dynamic Programming, we answer the following long-standing open questions: (i) Is the solution found in Carroll et al., (2017, 2000) optimal? (ii) Is it also unique or do other optimal solutions exist?

Keywords: Endogenous growth; Habit formation; Sufficient conditions of optimality; Dynamic programming; Viscosity solution (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Working Paper: Internal Habit Formation and Optimality (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:91:y:2020:i:c:p:165-172

DOI: 10.1016/j.jmateco.2020.09.008

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