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Is addiction "rational"? : theory and evidence

Author: Jonathan Gruber; Botond Kőszegi; National Bureau of Economic Research.
Publisher: Cambridge, MA : National Bureau of Economic Research, ©2000.
Series: Working paper series (National Bureau of Economic Research), working paper no. 7507.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Abstract: A standard model of addictive process is Becker and Murphy's rational addiction' model, which has the key empirical prediction that the current consumption of addictive goods should respond to future prices, and the key normative prediction that the optimal government regulation of addictive goods should depend only on their interpersonal externalities. While a variety of previous studies have supported  Read more...
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Additional Physical Format: Print version:
Gruber, Jonathan.
Is addiction "rational"?.
Cambridge, MA : National Bureau of Economic Research, ©2000
(OCoLC)43606314
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Jonathan Gruber; Botond Kőszegi; National Bureau of Economic Research.
OCLC Number: 606548091
Notes: "January 2000."
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010. MiAaHDL
Description: 1 online resource (47, [5] pages).
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 7507.
Responsibility: Jonathan Gruber, Botond Köszegi.

Abstract:

Abstract: A standard model of addictive process is Becker and Murphy's rational addiction' model, which has the key empirical prediction that the current consumption of addictive goods should respond to future prices, and the key normative prediction that the optimal government regulation of addictive goods should depend only on their interpersonal externalities. While a variety of previous studies have supported this empirical contention, we demonstrate that these results are very fragile. We propose a new empirical test for the case of cigarettes, using state excise tax increases that have been legislatively enacted but are not yet effective, and monthly data on consumption. We find strong evidence that consumption drops when there are announced future tax increases, providing more robust support for the key empirical prediction of the Becker and Murphy model. But we also propose a new formulation of this model that makes only one change, albeit a major one: the incorporation of the inconsistent preferences which are likely to provide a much better platform for understanding the smoking decision. We find that with these preferences the model continues to yield the predictions for forward-looking behavior that have been tested by others and by ourselves. But it has strikingly different normative implications, as with these preferences optimal government policy should depend as well on the internalities' imposed by smokers on themselves. We estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case.

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