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Internal Habit Formation and Optimality

Mauro Bambi () and Fausto Gozzi

No 2019_01, Working Papers from Durham University Business School

Abstract: Carroll et al. [7] establish that in a model with internal habits, an increase in economic growth may cause a positive change in savings. The optimality of this result has been recently questioned by several contributions in the literature which have observed that the parametrization used in [7] implies a utility function not jointly concave in consumption and habits. In this short paper, we revisit this issue: firstly we explain that it can be solved only through advanced techniques in Dynamic Programming and then we prove, using them, how the candidate optimal control found in [7] is indeed the unique optimal control

Keywords: Endogenous Growth; Habit Formation, Sufficient Conditions of Optimality, Dynamic Programming, Viscosity Solution. (search for similar items in EconPapers)
JEL-codes: C61 D91 E21 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-gro and nep-mac
Date: 2019-01
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