A Simple Nonadditive Preference Structure for Models of Household Behavior over Time.

Intertemporal separability is an almost universal assumption in empirical work on household behavior, but a good deal of recent work on consumption and labor supply suggest that it may not be tenable. The traditional weakening of this assumption is to allow for habit formation. The authors propose an alternative structure for intertemporal preferences that nests intertemporal additivity in a simple way and yields closed-form solutions for demand functions. This structure includes the neoclassical durables model as a special case. The author derives a demand system that nests the almost ideal system as its time-separable counterpart. This model is estimated on U.K. aggregate time-series data for seven goods. Time separability is decisively rejected. Copyright 1991 by University of Chicago Press.