Revealed Bounded rationality:Testing present bias in a Rational Addiction Equation
This paper deals with one of the main theoretical and empirical problems associated with the rational addiction model, namely that the demand equation derived from the rational addiction theory is not empirically distinguishable from models with forward-looking behavior, but with timeinconsistent preferences. The implication is that, even when forward-looking behavior can be convincingly supported, this equation cannot provide evidence in favor of time-consistent preferences against a model with dynamic inconsistency. In fact, we show that the possibility of testing for exponential versus non-exponential time discounting is nested within the rational addiction model. We propose a test of time consistency that uses only the information obtained from the general rational addiction demand equation and the price effects. A pseudo panel of Italian households is used to test for rational addiction in tobacco consumption. GMM estimators are used to deal with errors in variables and unobserved heterogeneity. The results conform to the theoretical predictions. We find evidence that tobacco consumers are forward-looking, but timeinconsistent. The values of the derived present bias and long run discount parameters are statistically significant and in line with the literature.
|Date of creation:||Dec 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Piazza S.Francesco,7 - 53100 Siena|
Web page: http://www.deps.unisi.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Badi H. Baltagi, 2007. "On The Use Of Panel Data Methods To Estimate Rational Addiction Models," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(1), pages 1-18, 02.
- Hanming Fang & Dan Silverman, 2007.
"Time-Inconsistency and Welfare Program Participation: Evidence from the NLSY,"
NBER Working Papers
13375, National Bureau of Economic Research, Inc.
- Hanming Fang & Dan Silverman, 2009. "Time-Inconsistency And Welfare Program Participation: Evidence From The Nlsy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1043-1077, November.
- Hanming Fang & Dan Silverman, 2004. "Time-inconsistency and Welfare Program Participation: Evidence from the NLSY," Cowles Foundation Discussion Papers 1465, Cowles Foundation for Research in Economics, Yale University.
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- Jonathan Gruber & Botond Koszegi, 2000. "Is Addiction "Rational"? Theory and Evidence," NBER Working Papers 7507, National Bureau of Economic Research, Inc.
- Ciccarelli, Carlo & Giamboni, Luigi & Waldmann, Robert, 2007.
"Cigarette smoking, pregnancy, forward looking behavior and dynamic inconsistency,"
8878, University Library of Munich, Germany.
- Carlo Ciccarelli & Luigi Giamboni & Robert J. Waldmann, 2008. "Cigarette Smoking, Pregnancy, Forward Looking Behavior and Dynamic Inconsistency," CEIS Research Paper 132, Tor Vergata University, CEIS, revised 14 Nov 2008.
- Frank J. Chaloupka, 1990.
"Rational Addictive Behavior and Cigarette Smoking,"
NBER Working Papers
3268, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:usi:wpaper:666. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fabrizio Becatti)
If references are entirely missing, you can add them using this form.