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Harmful Addiction

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  • Faruk Gul
  • Wolfgang Pesendorfer

Abstract

We construct an infinite horizon model of harmful addiction. Consumption is compulsive if it differs from what the individual would have chosen had commitment been available. A good is addictive if its consumption leads to more compulsive consumption of the same good. We analyse the welfare implications of drug policies and find that taxes on drugs decrease welfare while prohibitive policies may increase welfare. We also analyse the agent's demand for voluntary commitment (“rehab”). For appropriate parameters, the model predicts a cycle of addiction where the agent periodically checks into rehab. Between these visits his drug consumption increases each period. Copyright 2007, Wiley-Blackwell.

Suggested Citation

  • Faruk Gul & Wolfgang Pesendorfer, 2007. "Harmful Addiction," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 147-172.
  • Handle: RePEc:oup:restud:v:74:y:2007:i:1:p:147-172
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2007.00417.x
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