2009/09/20 by Roman Naryshkin, Matt Davison, Naryshkin, Roman +1
Decision Sciences · Economics, Econometrics and Finance · Mathematics · #Decision-Making and Behavioral Economics #Economic theories and models #FOS: Economics and business #FOS: Mathematics #General Finance (q-fin.GN) #Monetary Policy and Economic Impact #Optimization and Control (math.OC) #math.OC #q-fin.GN
paper · pdf · doi:10.48550/arxiv.0909.3655
11 pages, 7 figures
arxiv created 2009/09/20 · openalex publication_date 2009/09/20 · arxiv updated 2009/12/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This paper analyzes popular time-nonseparable utility functions that describe "habit formation" consumer preferences comparing current consumption with the time averaged past consumption of the same individual and "catching up with the Joneses" (CuJ) models comparing individual consumption with a cross-sectional average consumption level. Few of these models give reasonable optimum consumption time series. We introduce theoretically justified utility specifications leading to a plausible consumption behavior to show that habit formation preferences must be described by a power CRRA utility function different from the exponential CARA used for CuJ.