Hello,
I’m reading a paper and authors used a utility function as follow:
How to understand the consumption habit parameter ‘b’ and differentiated labor supply?
Thanks you for your help!
What exactly is the question? The habit formation mechanism seems to be standard. The differentiated labor supply is most probably a fiction to introduce wage stickiness.
Hi,
the term b in front of the lagged level of consumption basically determines how much this household cares about keeping its consumption level steady, ie close to last periods level.
Think about that it is in logs so basically it is Ct/bCt-1 and if b is close to one the household strongly wants to keep consumption steady.
Ups, just saw that Johannes has replied the same time, sorry 