Intertemporal Choice under Habit Formation

Ernst Fehr and Peter K. Zych

No 43, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Many of the most important choices in people's lives have an inter-temporal dimension, i.e., these choices are associated with a flow of benefits or costs that accrue in the future. In addition, such choices are frequently habit-forming. Yet, little is known about habit-forming inter-temporal choice behavior. This paper reports the results of an inter-temporal choice experiment with habit-formation. Subjects' choices deviate systematically from individually optimal decisions in the direction of over-consumption. This over-consumption is partly driven by loss avoidance, comparable to a real life situation in which addicted people consume addictive substances only in order to overpower withdrawal symptoms. Our results thus reject the theory of rational addiction.

Keywords: Inter-temporal Choice; Habit Formation; Addiction; Irrational Behaviour; Excess Consumption (search for similar items in EconPapers)
JEL-codes: C91 D12 D91 I10 (search for similar items in EconPapers)
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Citations: View citations in EconPapers (6)

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Related works:
Chapter: Intertemporal Choice under Habit Formation (2008)
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