Habits Revealed

Abstract

This paper sets out necessary and sufficient empirical conditions for rational intrinsic habits models in the revealed preference tradition of Samuelson (1948), Houthakker (1950), Afriat (1967), and Browning (1989). The conditions in the paper are shown to be computationally straightforward and to yield set identification for certain features of the model. The ideas outlined are applied to a microeconomic panel dataset. The addition of habit formation to the discounted utility model is shown to improve the rationalizability of the microdata considerably. Even if habit formation is rejected, it is shown that modest and plausible allowance for heterogeneity in prices and interest rates is sufficient to bring consumption behaviour into line with the theory.

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