COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1642R

Foundations of Intrinsic Habit Formation

Kareen Rozen

March 2008
Revised: March 2009

We provide theoretical foundations for several common (nested) representations of intrinsic linear habit formation. Our axiomatization introduces an intertemporal theory of weaning a decision-maker from her habits using the device of compensation. We clarify differences across specifications of the model, provide measures of habit-forming tendencies, and suggest methods for axiomatizing time-nonseparable preferences.

Keywords: Time-nonseparable preferences, Linear habit formation, Weaning, Compensated separability, Gains monotonicity

JEL Classification: C60, D11, D90