Deep Habits / Morten Ravn, Stephanie Schmitt-Grohe, Martin Uribe.

Format:

Book

Author/Creator:

Ravn, Morten.

Contributor:

National Bureau of Economic Research.

Schmitt-Grohe, Stephanie.

Uribe, Martin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10261.

NBER working paper series no. w10261

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

This paper generalizes the standard habit formation model to an environment in which agents form habits over individual varieties of goods as opposed to over a composite consumption good. We refer to this preference specification as `deep habit formation'. Under deep habits, the demand function faced by individual producers depends on past sales. This feature is typically assumed ad-hoc in customer market and brand switching cost models. A central result of the paper is that deep habits give rise to countercyclical markups, which is in line with the empirical evidence. This result is important because ad-hoc formulations of customer-market and switching-cost models have been criticized for implying procyclical and hence counterfactual markup movements. The paper also provides econometric estimates of the parameters pertaining to the deep habit model.

Notes:

Print version record

February 2004.