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An Extended Theory of Rational Addiction

Author

Listed:
  • Federico Perali

    (University of Verona)

  • Luca Piccoli

    (Universitat de les Illes Balears)

  • Knut R. Wangen

    (University of Oslo)

Abstract

This study extends the Rational Addiction theory by introducing an endogenous discounting of future utilities. The discount rate depends on habits accumulation over time which occur because of the repeated consumption of an addictive good. The endogeneity of the discount rate affects consumption decisions via a habits 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. 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 as binge drinking or extreme addiction states that may drive to death. The stability of the steady state mostly depend 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 & Knut R. Wangen, 2015. "An Extended Theory of Rational Addiction," DEA Working Papers 69, Universitat de les Illes Balears, Departament d'Economía Aplicada.
    • Handle: RePEc:ubi:deawps:69
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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

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

    JEL classification:

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

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