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When Do Habits Matter? The Empirical Content of Dynamic Hedonic Models

Josephine Auer

Abstract

Hedonic models value goods through their characteristics but are typically interpreted under time-separable preferences. This assumption is restrictive: when some attributes are habit forming, observed prices reflect both contemporaneous utility and continuation values from past consumption. I develop a nonparametric revealed preference framework for dynamic hedonic valuation, deriving necessary and sufficient conditions for rationalisability over characteristics. The framework separates restrictions imposed by the hedonic price system from those imposed by intertemporal choice and provides diagnostics that quantify the severity of violations along each margin. Applied to household scanner data, I show that most failures of static hedonic valuation reflect violations of the hedonic price structure; conditional on satisfying this structure, allowing for habit formation improves behavioural fit. This alters the mapping from prices to willingness-to-pay and the implied welfare interpretation.

When Do Habits Matter? The Empirical Content of Dynamic Hedonic Models

Abstract

Hedonic models value goods through their characteristics but are typically interpreted under time-separable preferences. This assumption is restrictive: when some attributes are habit forming, observed prices reflect both contemporaneous utility and continuation values from past consumption. I develop a nonparametric revealed preference framework for dynamic hedonic valuation, deriving necessary and sufficient conditions for rationalisability over characteristics. The framework separates restrictions imposed by the hedonic price system from those imposed by intertemporal choice and provides diagnostics that quantify the severity of violations along each margin. Applied to household scanner data, I show that most failures of static hedonic valuation reflect violations of the hedonic price structure; conditional on satisfying this structure, allowing for habit formation improves behavioural fit. This alters the mapping from prices to willingness-to-pay and the implied welfare interpretation.
Paper Structure (38 sections, 11 theorems, 81 equations, 9 figures, 12 tables)

This paper contains 38 sections, 11 theorems, 81 equations, 9 figures, 12 tables.

Table of Contents

  1. Introduction
  2. Model
  3. Consistency
  4. Afriat conditions for habits-over-characteristics
  5. A necessary rank condition for consistency
  6. Missing prices
  7. Corollaries and nesting results
  8. Habits-over-goods as a special case
  9. Intertemporally separable preferences over characteristics
  10. Habits and the rationalisability of cereal purchases
  11. Data
  12. Results
  13. Rationalisability scores
  14. Structural and behavioural sources of empirical discipline
  15. Discount factors
  16. ...and 23 more sections

Key Result

Lemma 2.1

The data $\{\bm{\rho}_t,\bm{x}_t\}_{t=1}^T$ are consistent with the one-lag habits-over-characteristics model for a given technology matrix $\bm{A}$ if and only if there exist a locally non-satiated, concave, superdifferentiable utility function $u(\cdot)$ and a discount factor $\beta\in(0,1]$ such with equality for all goods $k$ such that $x_t^k>0$, where the discounted shadow prices are and $\

Figures (9)

  • Figure 1: Distribution of constructed time periods and period lengths
  • Figure 2: Mean distance-to-manifold
  • Figure 3: Critical Cost Efficiency Index (CCEI)
  • Figure 4: Units purchased per household-period
  • Figure 5: Average purchasing intensity across households
  • ...and 4 more figures

Theorems & Definitions (16)

  • Definition 2.1: Consistency
  • Lemma 2.1: Consistency Conditions
  • Theorem 2.1
  • Proposition 2.1
  • Theorem 2.2
  • Definition 3.1
  • Corollary 3.1
  • Definition 3.2
  • Corollary 3.2
  • Definition B.1
  • ...and 6 more