Time, Habits, and Consumer Durables

This chapter reviews the most important sources of non-separability. In models with habit formation the marginal utility provided by today’s consumption depends on past consumption (internal habits) or on the level of aggregate consumption (external habits). The analysis of durable goods is similar in most respects to models with habits. Durable goods put a wedge between expenditure (which takes places in one period) and consumption (over multiple subsequent periods). Non-separability between consumption and leisure posits that the utility from consuming a good might depend on the amount of leisure time one has available. Another important deviation from the model with separable preferences is home production. Models incorporating home production assume that consumers allocate their time among three activities: work, leisure, and home production. Finally, collective models of behavior assume that household members have different preferences with regard to individual consumption, individual leisure time, and public (shared) goods.