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An Extended Theory of Rational Addiction

Author

Listed:
  • Federico Perali

    (Department of Economics, University of Verona, 37129 Verona, Italy)

  • Luca Piccoli

    (Department of Sociology and Social Research, University of Trento, 38122 Trento, Italy
    IZA Institute of Labor Economics, 53113 Bonn, Germany)

Abstract

This study extends the rational addiction theory by introducing an endogenous discounting of future utilities. The discount rate depends on habits accumulating over time because of the repeated consumption of an addictive good. The endogeneity of the discount rate affects consumption decisions via a habit-dependent rate of time preference and discloses a patience-dependence trade-off. The existence of a steady state in which habits do not grow and its optimality are proven. The local stability properties of the steady state reveal that the equilibrium can be a saddle node, implying smooth convergence to the steady state, but also a stable or unstable focus, potentially predicting real-world behaviors such as binge drinking or extreme addiction states that may drive to death. The stability of the steady state mostly depends on the habit formation process, suggesting that heterogeneity in habit formation may be a key component to explain heterogeneity in time preferences.

Suggested Citation

  • Federico Perali & Luca Piccoli, 2022. "An Extended Theory of Rational Addiction," Mathematics, MDPI, vol. 10(15), pages 1-20, July.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:15:p:2652-:d:874326
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    Cited by:

    1. Piccoli, Luca & Tiezzi, Silvia, 2023. "Eggs When Young, Chicken When Old. Time Consistency and Addiction over the Life Cycle," IZA Discussion Papers 16372, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    addiction; habit formation; endogenous discounting; time consistency;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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