Deep Habits

Morten Ravn, Stephanie Schmitt-Grohe and Martín Uribe ()

No 10261, NBER Working Papers from National Bureau of Economic Research, Inc

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 countercyclical markups, 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 procyclical and hence counterfactual markup movements. The paper also provides econometric estimates of the parameters pertaining to the deep habit model.

JEL-codes: D10 D12 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-dge and nep-hea
Note: EFG IO
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Citations: View citations in EconPapers (11)

Published as Ravn, Morten, Stephenaie Schmitt-Grohe and Martin Uribe. "Deep Habits," Review of Economic Studies, 2006, v73(1,Jan), 195-218.

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