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A revealed preference analysis of the rational addiction model

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  • Thomas DEMUYNCK
  • Ewout VERRIEST

Abstract

We provide a revealed preference analysis of the rational addiction model. The revealed preference approach avoids the need to impose an, a priori unverifiable, functional form on the underlying utility function. Our results extend the previously established revealed preference characterizations for the life cycle model and the one-lag habits model. We show that our characterization is easily testable by means of linear programming methods and we demonstrate its practical usefulness by means of an application to Spanish household consumption data.

Suggested Citation

  • Thomas DEMUYNCK & Ewout VERRIEST, 2011. "A revealed preference analysis of the rational addiction model," Working Papers Department of Economics ces11.12, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces11.12
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