Abstract: Based on the theory of habit formation, this paper firstly establishes a dynamic panel data model by making use of the provincial data of China from 2003 to 2015, then it conducts an empirical study of the habit formation and intertemporal substitution of rural residents’ consumption with the generalized method of moment. The findings show that firstly, the consumption behavior of rural residents has significant characteristics of internal habit formation, and their consumption expenditure is affected by the levels of previous consumption expenditure; secondly, the consumption of rural residents has a significant demonstration effect, the individual consumption behavior will be affected by the level of consumption of surrounding residents; thirdly, the elasticity of intertemporal substitution of rural residents is relatively higher; fourthly, the product of the elasticity of intertemporal substitution and the relative risk aversion parameter is less than 1, which indicates that the assumption of time separability of consumption utility function is disconfirmed, namely, the utility function of the consumers is not separable in time.

Key words: habit formation; intertemporal substitution; consumption