Saving and habit formation: evidence from Dutch panel data

Abstract

This paper focuses on the role of habit formation in individual preferences. In this study, the model of Alessie and Lusardi (Econ Lett 55:103–108, 1997) and its extension by Guariglia and Rossi (Oxf Econ Pap 54:1–19, 2002) are considered. Our empirical specifications are based on their closed-form solutions, where current saving is expressed as a function of lagged saving and other regressors. In our study, we use a longitudinal data set from the Netherlands that allows us to disentangle the role of habit formation from unobserved heterogeneity. Contrary to most other studies using survey data, we find evidence in favor of habit formation. However, the magnitude of the habit formation coefficient is rather small. Income uncertainty seems to affect saving behavior of Dutch households.

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