TY  - BOOK
AU  - Chetty,Raj
AU  - Szeidl,Adam
ED  - National Bureau of Economic Research.
TI  - Consumption Commitments and Habit Formation
T2  - NBER working paper series
PY  - 2004///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - December 2004; Hardcopy version available to institutional subscribers
N2  - We analyze the implications of household-level adjustment costs for the dynamics of aggregate consumption. We show that an economy in which agents have "consumption commitments" is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk. Consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth, findings that are typically attributed to habit formation. Unlike habit formation and other theories, but consistent with empirical evidence, the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks. These results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs. We develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications
UR  - https://www.nber.org/papers/w10970
UR  - http://dx.doi.org/10.3386/w10970
ER  -