Utility function of habit formation model - Economics Stack Exchange most recent 30 from economics.stackexchange.com 2022-01-23T00:38:22Z https://economics.stackexchange.com/feeds/question/19557 https://creativecommons.org/licenses/by-sa/4.0/rdf https://economics.stackexchange.com/q/19557 2 Utility function of habit formation model user68863 https://economics.stackexchange.com/users/14729 2017-12-02T17:37:56Z 2017-12-04T21:18:23Z <p>In the habit formation RBC model, the utility can be given as follows:</p> <p>$U(c_{t},n_{t}) = \ln(c_{t}) - \frac{\theta}{1+\upsilon} \bigg(\frac{n_{t}}{n_{t-1}^{\phi}}\bigg)^{1+\upsilon}$</p> <p>When I do FOC wrt $n_t$, I'm confused about how to treat the variable $n_{t-1}$. Is it exogenous or should I try to find $\frac{\partial n_{t-1}}{\partial n_t}$?</p> <p>Many thanks.</p> https://economics.stackexchange.com/questions/19557/-/19582#19582 1 Answer by fabriceulysse for Utility function of habit formation model fabriceulysse https://economics.stackexchange.com/users/12128 2017-12-04T21:11:15Z 2017-12-04T21:17:30Z <p>I believe $n_{t-1}$ is a quantity from the past, so you should be able to treat it as an exogenous variable</p> https://economics.stackexchange.com/questions/19557/-/19583#19583 1 Answer by N. X for Utility function of habit formation model N. X https://economics.stackexchange.com/users/14662 2017-12-04T21:17:09Z 2017-12-04T21:17:09Z <p>$n_{t-1}$ is exogenous at time $t$. Since you must be working in a dynamic setting, $n_t$ will also show up in the utility function at time $t+1$.</p>