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Some Fundamental Problems in Becker, Grossman and Murphy's Implementation of Rational Addiction Theory

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Abstract

The econometric implementation of rational addiction theory has been highly influenced by Becker, Grossman and Murphy (BGM). They specify an Euler equation where current consumption is determined by current price and past and future consumption. This model is claimed to be able to discriminate between rational addictive, myopic addictive, and non-addictive behavior. However, as demonstrated in this paper, the coefficients of the Euler equation are not structural parameters. Provided that two implausible assumptions do not hold, the Euler equation coefficients for the rational addict are shown to be non-constant. But even when these assumptions are assumed to be valid, the coefficients of the Euler equation will vary under the alternative hypothesis of myopic addiction. Moreover, and in contrast to the common interpretation, BGM's non-addicted consumer is influenced by past consumption, implying that a rational and a myopic non-addict behave differently. These problems makes it unclear how analyses based on the BGM approach can support, or reject, rational addiction theory.

Suggested Citation

  • 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.
  • Handle: RePEc:ssb:dispap:375
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    References listed on IDEAS

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    1. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, vol. 89(1), pages 103-124, March.
    2. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," Review of Economic Studies, Oxford University Press, vol. 23(3), pages 165-180.
    3. 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.
    4. 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.
    5. 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.
    6. Orphanides, Athanasios & Zervos, David, 1998. "Myopia and Addictive Behaviour," Economic Journal, Royal Economic Society, vol. 108(446), pages 75-91, January.
    7. Pacula, Rosalie Liccardo, 1997. "Women and Substance Use: Are Women Less Susceptible to Addiction?," American Economic Review, American Economic Association, vol. 87(2), pages 454-459, May.
    8. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1261-1303.
    9. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    10. 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.
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    Cited by:

    1. Biørn, Erik, 2009. "Modelling Addiction in Life-Cycle Models: Revisiting the Treatment of Latent Stocks and Other Unobservables," Memorandum 26/2009, Oslo University, Department of Economics.
    2. Miljkovic, Dragan & Nganje, William & de Chastenet, Helene, 2008. "Economic factors affecting the increase in obesity in the United States: Differential response to price," Food Policy, Elsevier, vol. 33(1), pages 48-60, February.

    More about this item

    Keywords

    Rational addiction; Euler equation;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • I10 - Health, Education, and Welfare - - Health - - - General

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