A nonparametric analysis of habits models

Abstract

This paper presents a nonparametric analysis of the canonical habits model. The approach is based on the combinatorial/revealed preference framework of Samuelson (1948), Houthakker (1950, Afriat (1967) and Varian (1982) and the extenstion and application of these ideas to intertemporal models in Browning (1989). It provides a simple finitely computable test of the model which does not require a parameterisation of the underlying (hypothesised) preferences. It also yields set identification of important features of the canonical habits model including the consumer's rate of time preference and the welfare effects of habit-formation. The ideas presented are illustrated using Spanish panel data.Acknowledgements I am grateful to Martin Browning, Mette Christensen, Lars Nesheim, Stephen Nickell, Frans Spinnewyn and seminar particpants at Cambridge, Leuven, Oxford and York for helpful comments and to Neil Rickman who suggested looking at this topic in the first place. The usual disclaimer applies.