Habit Persistence and Keeping Up with the Joneses:Evidence from Micro Data

47 Pages Posted: 3 Nov 2008 Last revised: 14 Aug 2019

See all articles by Enrichetta Ravina

Enrichetta Ravina

Federal Reserve Bank of Chicago; Center for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: April 20, 2019

Abstract

This paper provides evidence that habit persistence is an important determinant of household consumption choices, in a setting that allows for heterogeneity and household-specific interest rates. By estimating Euler equations for a representative sample of U.S. credit-card account holders, I find that the strength of external habit, captured by the fraction of the consumption of the reference group that enters the utility function, is 0.290, and that the strength of internal habit, represented by household past consumption, is 0.503. My results are robust to the inclusion of various measures of economic activity in the regression, tests for the presence of aggregate shocks, liquidity constraints, precautionary saving motives, and learning. Aggregation of the Euler equations as a weighted average of individual marginal rates of substitution accounts for heterogeneity and market incompleteness and preserves the results.

Suggested Citation

Ravina, Enrichetta, Habit Persistence and Keeping Up with the Joneses:Evidence from Micro Data (April 20, 2019). NYU Working Paper No. FIN-05-046, Available at SSRN: https://ssrn.com/abstract=1294189

Enrichetta Ravina (Contact Author)

Federal Reserve Bank of Chicago ( email )

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United States

HOME PAGE: http://https://sites.google.com/view/eravina/research

Center for Economic Policy Research (CEPR) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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