Quasi-Myopic Habit-Formation

Abstract

This papers develops the model of quasi-myopic habit-formation that an agent only partially anticipates the change in the stock of habit. It generalizes the analysis of habitual behavior and treats myopic and rational habit-formations as two polar cases of either totally failing to look ahead or fully accounting the habit-formation effect on the future utility. Using an analogous method in Ryder and Heal (1973), the condition of adjacent complementarity for a quasi-myopic agent is derived and showed that a quasi-myopic agent relatively underappreciates the growth in the habit’s direct effect on the utility. A quasi-myopic agent perceives to have the shift in preferences for or against a habit-forming commodity, while also underappreciating the intertemporal-intrapersonal externality (i.e., internality). The quasi-myopic habit-formation let an agent to internalize an equivalent degree of internality to when the future utility is discounted quasi-hyperbolically instead, which suggests that the quasi-myopic habit-formation and the present biased preference lead to a qualitatively equivalent suboptimal behavior. Furthermore, the reformulation of subsequent plans results in the divergence in possible equilibria such that with adjacent complementarity, the development into a sizable consumption of addiction becomes more likely when the habit is harmful but into the consumption near the abstention when the habit is beneficial.

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