A Non-Optimal Consumption Model with Habit Formation Over the Life Cycle

This paper argues that individual's consumption is not only determined by the financial wealth and expected income, but also determined by the past consumption or habits. To introduce habits parameters into the classic life cycle model, it is suggested that individual's real consumption is between the optimal consumption and the former consumption without changing the utility function. Then the habits parameters' effect on the lifetime consumption and wealth is examined. The result also shows that habits may cause precautionary saving, and consumption may track the income.