publication . Preprint . Research . 1986

Habits, Rationality and Myopia in the Life-Cycle Consumption Function

Muellbauer, John;
Open Access
  • Published: 01 Jun 1986
  • Country: United Kingdom
Abstract
This paper investigates the role of habits in the consumption function. Two types of habits are considered: rational and myopic, these being distinctions which have long been made in the literature on systems of demand equations. In both cases past consumption affects current preferences, thus breaking the intertemporal separability of preferences often assumed by economists. If habits are rational, consumers are aware of the effect of their current consumption decisions on their future marginal rates of substitution. If habits are myopic, consumers lack this awareness and this may result in a time inconsistency in their behaviour. We explore the consequences of...
Subjects
free text keywords: Consumption Function; Myopic Habit Formation; Rational Habit Formation
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