Internal habits formation and optimality

Bambi, Mauro; Gozzi, Fausto

Abstract

In a very influential model with internal habits, Carroll et al., (2017, 2000), establish that an increase in economic growth may cause a positive change in savings. The optimality of this result, and of many other contributions using a similar framework, has been questioned by some authors who have observed that the parametrization used in these models always implies a utility function not jointly concave in consumption and habits. In this paper, we revisit the optimality issue and, using advanced techniques in Dynamic Programming, we answer the following long-standing open questions: (i) Is the solution found in Carroll et al., (2017, 2000) optimal? (ii) Is it also unique or do other optimal solutions exist?

Citation

Bambi, M., & Gozzi, F. (2020). Internal habits formation and optimality. Journal of Mathematical Economics, 91, 165-172. https://doi.org/10.1016/j.jmateco.2020.09.008

• Journal Article Type: Article
• Acceptance Date: Sep 28, 2020
• Online Publication Date: Oct 16, 2020
• Publication Date: 2020-12
• Deposit Date: Oct 12, 2020
• Publicly Available Date: Apr 16, 2022
• Journal: Journal of Mathematical Economics
• Print ISSN: 0304-4068
• Electronic ISSN: 1873-1538
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 91
• Pages: 165-172
• DOI: https://doi.org/10.1016/j.jmateco.2020.09.008
• Public URL: https://durham-repository.worktribe.com/output/1290341