Dynamic theory of preferences: Habit formation and taste for variety

Aldo Rustichini, Paolo Siconolfi

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

We analyze individual preferences over infinite horizon consumption choices. Our axioms provide the foundation for a recursive representation of the utility function that contains as particular cases the classical Koopmans representation (Koopmans (1960)) as well as the habit formation specification.We examine some of the consequences of our axiomatization by considering a standard consumer choice problem, and show that typically in the space of concave utility functions satisfying our axioms the consumer displays a taste for variety. The latter means that such a consumer selects optimally time variant consumption programs for any given time invariant sequence of commodities' relative prices and for all possible sequences of market discount factors. In contrast, if a concave utility function satisfies Koopmans' axioms the consumer does not display a taste for variety.

Original languageEnglish (US)
Pages (from-to)55-68
Number of pages14
JournalJournal of Mathematical Economics
Volume55
Issue number1
DOIs
StatePublished - Jan 1 2014

Keywords

  • Habit formation
  • Taste for variety
  • Time preferences

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