Internal Habit Formation and Optimality

Bambi, Mauro; Gozzi, Fausto

Abstract

Carroll et al. [7] establish that in a model with internal habits, an increase in economic growth may cause a positive change in savings. The optimality of this result has been recently questioned by several contributions in the literature which have observed that the parametrization used in [7] implies a utility function not jointly concave in consumption and habits. In this short paper, we revisit this issue: firstly we explain that it can be solved only through advanced techniques in Dynamic Programming and then we prove, using them, how the candidate optimal control found in [7] is indeed the unique optimal control.

Citation

Bambi, M., & Gozzi, F. Internal Habit Formation and Optimality

• Working Paper Type: Working Paper
• Publication Date: Jan 1, 2019
• Deposit Date: May 23, 2019
• Publicly Available Date: May 23, 2019
• Series Title: Durham University Business School working papers series
• Public URL: https://durham-repository.worktribe.com/output/1168040
• Publisher URL: https://www.dur.ac.uk/business/research/economics/working-papers/