Foundations of Intrinsic Habit Formation


  • Kareen Rozen

    1. Cowles Foundation and Dept. of Economics, Yale University, Box 208281, New Haven, CT 06520-8281, U.S.A.;
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    • I am grateful to a co-editor and anonymous referees for advice that greatly improved this paper. I am indebted to Roland Benabou, Wolfgang Pesendorfer, and especially Eric Maskin for their guidance during this paper's development. I also thank Dilip Abreu, Dirk Bergemann, Faruk Gul, Giuseppe Moscarini, Jonathan Parker, Ben Polak, Michael Rothschild, Larry Samuelson, Ron Siegel, and numerous seminar participants for helpful comments. This paper is based on the first chapter of my doctoral dissertation at Princeton University.


We provide theoretical foundations for several common (nested) representations of intrinsic linear habit formation. Our axiomatization introduces an intertemporal theory of weaning a decision-maker from her habits using the device of compensation. We clarify differences across specifications of the model, provide measures of habit-forming tendencies, and suggest methods for axiomatizing time-nonseparable preferences.