A Linear Expenditure System with Adjustment Costs

This paper develops a new dynamic version of the linear expenditure system. The dynamics derive from the utility function specification which includes an adjustment cost term. As a result, the consumer is less likely to fine‐tune his consumption pattern—the substitution effects of small price changes are zero. The issue of the discrimination between this model of habit persistence and the Pollak and Wales habit formation model is discussed in some detail. Some preliminary estimates of the model are reported; these estimates were obtained using a quarterly Australian data base in which six commodities are individually distinguished.