Consumption as a Social Phenomenon in the Modern Theory of Intertemporal Choice

The modern theory of intertemporal choice rests on the idea that individuals allocate resources over time so as to maximise lifetime expected utility. This analytical framework rests on the theories developed in the 1950s by Modigliani and Friedman and revisited in the 1970s with the introduction of the rational expectations assumption. In response to the poor empirical performance of the original model, during the last decades a number of modifications and extensions have been proposed in the attempt at making the model able to explain the data. An extremely popular extension involves the dependence of utility on either individual’s own past consumption or aggregate consumption. Such models, usually referred to as including ‘habit-forming preferences’ or ‘social preferences’, are viewed as incorporating insights belonging to the approach that views consumption as largely determined by social factors. The idea is that consumption is affected by individuals’ concern for the display of their social status, an insight dating back at least to the work of Veblen. The paper discusses the implications of the assumptions of ‘habit formation’ and ‘social preferences’, inquiring into their relationship with the view of consumption as a social phenomenon and their compatibility with neoclassical theory of intertemporal choice.