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Modelling Addiction in Life-Cycle Models: Revisiting the Treatment of Latent Stocks and Other Unobservables

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Listed author(s):
  • Biørn, Erik

    ()

    (Dept. of Economics, University of Oslo)

Abstract

Dynamic modeling of demand for goods whose cumulated stocks enter an intertemporal utility function as latent variables, is discussed. The issues include: how represent addiction, how handle unobserved expectations and changing plans, how deal with `dynamic inconsistency'? Arguments are put forth to give all optimizing conditions attention, not only those in which all variables are observable. If the latter, fairly common, `limited information-reduced dimension' strategy is pursued, problems are shown to arise in attempting to identify coe±cients of the preference structure and to test for addictive stocks. Examples, based on quadratic utility functions, illustrate the main points and challenge the validity of testing the `rational addiction' hypothesis, by using linear, single- equation autoregressive models, as suggested by Becker, Grossman, and Murphy (1994) and adopted in several following studies.

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File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2009/Memo-26-2009.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 26/2009.

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Length: 26 pages
Date of creation: 15 Dec 2009
Handle: RePEc:hhs:osloec:2009_026
Contact details of provider: Postal:
Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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More information through EDIRC

Keywords: Life-cycle model. Addiction. Identi¯cation. Latent stocks; Perfect foresight; Ra- tional expectations; Dynamic inconsistency;

Find related papers by JEL classification:

  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
  • D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
  • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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  1. Knut R. Wangen, 2004. "Some Fundamental Problems in Becker, Grossman and Murphy's Implementation of Rational Addiction Theory," Discussion Papers 375, Statistics Norway, Research Department.
  2. Phlips, Louis, 1972. "A Dynamic Version of the Linear Expenditure Model," The Review of Economics and Statistics, MIT Press, vol. 54(4), pages 450-458, November.
  3. Diewert, W E, 1974. "Intertemporal Consumer Theory and the Demand for Durables," Econometrica, Econometric Society, vol. 42(3), pages 497-516, May.
  4. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-957, July.
  5. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  6. Peter B. Dixon & Constantino Lluch, 1977. "Durable Goods in the Extended Linear Expenditure System," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 381-384.
  7. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
  8. Baltagi, Badi H & Griffin, James M, 2001. "The Econometrics of Rational Addiction: The Case of Cigarettes," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 449-454, October.
  9. Lluch, Constantino, 1974. "Expenditure, Savings and Habit Formation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 786-797, October.
  10. Labeaga, Jose M., 1999. "A double-hurdle rational addiction model with heterogeneity: Estimating the demand for tobacco," Journal of Econometrics, Elsevier, vol. 93(1), pages 49-72, November.
  11. Andrew M. Jones & José M. Labeaga, 2003. "Individual heterogeneity and censoring in panel data estimates of tobacco expenditure," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 157-177.
  12. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
  13. Badi H. Baltagi & James M. Griffin, 2002. "Rational addiction to alcohol: panel data analysis of liquor consumption," Health Economics, John Wiley & Sons, Ltd., vol. 11(6), pages 485-491.
  14. Knut R. Wangen & Erik Biørn, 2001. "Individual Heterogeneity and Price Responses in Tobacco Consumption: A Two-Commodity Analysis of Unbalanced Panel Data," Discussion Papers 294, Statistics Norway, Research Department.
  15. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
  16. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-763, Part I Ju.
  17. Pashardes, Panos, 1986. "Myopic and Forward Looking Behavior in a Dynamic Demand System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 387-397, June.
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