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

47 Pages Posted: 5 Sep 2006 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 of habit persistence in household consumption choices. 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 the strength of internal habit, represented by household past consumption, is 0.503. The results are robust to controlling for various measures of economic activity, 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.

Keywords: Habit Persistence, Micro Data, Household Finance, Social Interactions

JEL Classification: G12, E21, D12

Suggested Citation

Ravina, Enrichetta, Habit Formation and Keeping Up with the Joneses: Evidence from Micro Data (April 20, 2019). Available at SSRN: https://ssrn.com/abstract=928248 or http://dx.doi.org/10.2139/ssrn.928248

Enrichetta Ravina (Contact Author)

Federal Reserve Bank of Chicago ( email )

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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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