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Internal habits formation and optimality

Bambi, Mauro; Gozzi, Fausto

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Authors

Fausto Gozzi



Abstract

In a very influential model with internal habits, Carroll et al., (2017, 2000), establish that an increase in economic growth may cause a positive change in savings. The optimality of this result, and of many other contributions using a similar framework, has been questioned by some authors who have observed that the parametrization used in these models always implies a utility function not jointly concave in consumption and habits. In this paper, we revisit the optimality issue and, using advanced techniques in Dynamic Programming, we answer the following long-standing open questions: (i) Is the solution found in Carroll et al., (2017, 2000) optimal? (ii) Is it also unique or do other optimal solutions exist?

Citation

Bambi, M., & Gozzi, F. (2020). Internal habits formation and optimality. Journal of Mathematical Economics, 91, 165-172. https://doi.org/10.1016/j.jmateco.2020.09.008

Journal Article Type Article
Acceptance Date Sep 28, 2020
Online Publication Date Oct 16, 2020
Publication Date 2020-12
Deposit Date Oct 12, 2020
Publicly Available Date Mar 29, 2024
Journal Journal of Mathematical Economics
Print ISSN 0304-4068
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 91
Pages 165-172
DOI https://doi.org/10.1016/j.jmateco.2020.09.008
Public URL https://durham-repository.worktribe.com/output/1290341

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