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Saving and Habit Formation: Evidence from Dutch Panel Data

Alessie,R.J.M.
; 
Teppa,F.
Abstract
This paper focuses on the role of habit formation in individual preferences over consumption and saving.We closely relate to Alessie and Lusardi's (1997) model as we estimate a model which is based on their closed-form solution, where saving is expressed as a function of lagged saving and other regressors. Alternatively, we could use an Euler-equation approach (see e.g.Guariglia and Rossi (2001) and Dynan (2000)), but we will argue that this approach may yield spuriously negative estimates of the habit formation parameter because in surveys consumption is typically measured with considerable error.A second reason to use the closed form solution as a basis of the empirical model is that it embodies more information about the habit formation model than the Euler equation.Therefore, the closed form solution allows for a more powerful test of the validity of the habit formation model than the Euler equation approach.
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Subsequently published in Empirical Economics, 2010 Pagination: 26
Date
2002
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Publisher
Econometrics
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Tilburg University Research Output Collection
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Keywords
preferences, savings, incomes, habit formation, D91 - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Citation
Alessie, R J M & Teppa, F 2002 'Saving and Habit Formation : Evidence from Dutch Panel Data' CentER Discussion Paper, vol. 2002-62, Econometrics, Tilburg.
URI
https://hdl.handle.net/20.500.14602/26919
License
info:eu-repo/semantics/restrictedAccess
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