TY  - JOUR
AU  - Ravn,Morten
AU  - Schmitt-Grohe,Stephanie
AU  - Uribe,Martin
TI  - Deep Habits
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10261
PY  - 2004
Y2  - February 2004
UR  - http://www.nber.org/papers/w10261
N1  - Author contact info:
Morten Ravn
Department of Economics
University College London
London WC1E 6BT
UK
E-Mail: m.ravn@ucl.ac.uk

Stephanie Schmitt-Grohe
Department of Economics
Columbia University
New York, NY 10027
Tel: 212/854-8059
Fax: 212/854-4010
E-Mail: stephanie.schmittgrohe@columbia.edu

Martin Uribe
Department of Economics
Columbia University
International Affairs Building
New York, NY 10027
Tel: 212 851 4008
Fax: 212 854 8059
E-Mail: martin.uribe@columbia.edu
AB  - 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.
ER  -