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AUTHORS: Michael K. Wohlgenant
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.