TITLE:
The Intertemporal State Adjustment Model
AUTHORS:
Michael K. Wohlgenant
KEYWORDS:
State Adjustment Model, Consumer Inventory Behavior, Intertemporal Consumer Choice
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.3,
April
24,
2017
ABSTRACT: The implications of the
intertemporal state adjustment model (ISAM) are evaluated. The ISAM accounts
for the effect of current purchases on future utility through a state variable
that can either reflect habit formation or inventory holding. The model is
shown to be forward looking with purchases depending upon beginning-of-the
period state variable as well as the present discounted value of future user
costs of the state variable. In this way, the model accounts for the
speculative motive for inventory holding. The myopic state adjustment model, which depends on
the beginning-of-the period state variable and current price, is a special case
of ISAM when the discount rate is zero. Other special cases of the ISAM are
identified and alternative representations of it for empirical analysis are presented.