Internal Habit Formation and Optimality

Bambi, Mauro; Gozzi, Fausto

Internal Habit Formation and Optimality

Bambi, Mauro; Gozzi, Fausto

Authors

Dr Mauro Bambi mauro.bambi@durham.ac.uk
Associate Professor

Fausto Gozzi

Abstract

Carroll et al. [7] establish that in a model with internal habits, an increase in economic growth may cause a positive change in savings. The optimality of this result has been recently questioned by several contributions in the literature which have observed that the parametrization used in [7] implies a utility function not jointly concave in consumption and habits. In this short paper, we revisit this issue: firstly we explain that it can be solved only through advanced techniques in Dynamic Programming and then we prove, using them, how the candidate optimal control found in [7] is indeed the unique optimal control.

Citation

Bambi, M., & Gozzi, F. (2019). Internal Habit Formation and Optimality

Publication Date	Jan 1, 2019
Deposit Date	May 23, 2019
Publicly Available Date	May 23, 2019
Series Title	Durham University Business School working papers series
Public URL	https://durham-repository.worktribe.com/output/1168040
Publisher URL	https://www.dur.ac.uk/business/research/economics/working-papers/