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Internal habits formation and optimality.

Bambi, Mauro and Gozzi, Fausto (2020) 'Internal habits formation and optimality.', Journal of mathematical economics., 91 . pp. 165-172.


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?

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Publisher statement:© 2020 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:28 September 2020
Date deposited:13 October 2020
Date of first online publication:16 October 2020
Date first made open access:16 April 2022

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