NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Consumption Commitments and Habit Formation

Raj Chetty, Adam Szeidl

NBER Working Paper No. 10970
Issued in December 2004
NBER Program(s):   EFG   PE

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 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 despite generating similar aggregate consumption patterns in many environments.

download in pdf format
   (483 K)

email paper

This paper is available as PDF (483 K) or via email.

This paper was revised on October 16, 2014

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10970

Users who downloaded this paper also downloaded these:
Chetty and Szeidl w15998 The Effect of Housing on Portfolio Choice
Chetty and Szeidl w12467 Consumption Commitments and Risk Preferences
Chetty w10211 Consumption Commitments, Unemployment Durations, and Local Risk Aversion
Chetty, Guren, Manoli, and Weber w16729 Does Indivisible Labor Explain the Difference Between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities
Chetty and Saez w10841 Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us