Interpreting the results of empirical analyses of intertemporal allocation: An identification problem

Empirical analyses of household behaviour often find that behaviour is intertemporally non-additive, in the sense that past state variables affect current behaviour. This may be because preferences are nonadditive (because of habits or satiation) or because budgets are non-additive (for example, because of human capital formation or imperfections in credit markets). In this note I show that there is a fundamental identification problem in that we cannot infer from observed quantities and prices whether any nonadditivity in behaviour is coming from the budget constraint or the utility function.