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Internal habit formation and optimality.

Bambi, Mauro and Gozzi, Fausto (2019) 'Internal habit formation and optimality.', Working Paper. Durham University Business School, Durham.


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.

Item Type:Monograph (Working Paper)
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Date accepted:No date available
Date deposited:23 May 2019
Date of first online publication:2019
Date first made open access:No date available

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