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Rational Exuberance at the Mall: Addiction to Carrying a Credit Card Balance

We test the Becker-Murphy model of rational addiction with New Zealand credit card debt data. Our results clearly favour the rational addiction model over the myopic, backward-looking model. The estimated short-run and long-run price elasticities are -0.58 and -2.32 respectively, and the estimated rate of time-preference is 6.7% per quarter.

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File URL: http://www.uvic.ca/socialsciences/economics/assets/docs/econometrics/ewp0508.pdf
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Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 0508.

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Length: 13 pages
Date of creation: 21 Jun 2005
Date of revision:
Handle: RePEc:vic:vicewp:0508
Note: ISSN 1485-6441
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Web page: http://web.uvic.ca/econ

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  1. Bentzen, J. & Eriksson, T. & Smith, V., 1997. "Rational Addiction and Alcohol Consumption: Evidence from the Nordic Countries," Papers 97-16, Aarhus School of Business - Department of Economics.
  2. 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.
  3. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
  4. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 215-238.
  5. Grossman, Michael & Chaloupka, Frank J & Sirtalan, Ismail, 1998. "An Empirical Analysis of Alcohol Addiction: Results from the Monitoring the Future Panels," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 39-48, January.
  6. Samuel Cameron, 1999. "Rational addiction and the demand for cinema," Applied Economics Letters, Taylor & Francis Journals, vol. 6(9), pages 617-620.
  7. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  8. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  9. Chaloupka, Frank, 1991. "Rational Addictive Behavior and Cigarette Smoking," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 722-42, August.
  10. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  11. Dewenter, Ralf, 2003. "Rational Addiction to News?," Working Paper 2/2003, Helmut Schmidt University, Hamburg.
  12. Nilss Olekalns & Peter Bardsley, 1994. "Rational Addiction to Caffeine: an Analysis of Coffee Consumption," Working Papers 1994.21, School of Economics, La Trobe University.
  13. Laux, Fritz L., 2000. "Addiction as a market failure: using rational addiction results to justify tobacco regulation," Journal of Health Economics, Elsevier, vol. 19(4), pages 421-437, July.
  14. Peter J. Hammond, 1976. "Changing Tastes and Coherent Dynamic Choice," Review of Economic Studies, Oxford University Press, vol. 43(1), pages 159-173.
  15. Philip Hans Franses, 2001. "How to deal with intercept and trend in practical cointegration analysis?," Applied Economics, Taylor & Francis Journals, vol. 33(5), pages 577-579.
  16. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1990. "An Empirical Analysis of Cigarette Addiction," NBER Working Papers 3322, National Bureau of Economic Research, Inc.
  17. Ghysels, Eric & Lee, Hahn S. & Noh, Jaesum, 1994. "Testing for unit roots in seasonal time series : Some theoretical extensions and a Monte Carlo investigation," Journal of Econometrics, Elsevier, vol. 62(2), pages 415-442, June.
  18. Bask, Mikael & Melkersson, Maria, 2000. "Rational Addiction and Smoking when there are Legal and Illegal Cigarettes," Umeå Economic Studies 543, Umeå University, Department of Economics.
  19. Sisto, Andrea & Zanola, Roberto, 2004. "Rational Addiction to Cinema? A Dynamic Panel Analysis of European Countries," POLIS Working Papers 38, Institute of Public Policy and Public Choice - POLIS.
  20. Grossman, Michael & Chaloupka, Frank J., 1998. "The demand for cocaine by young adults: a rational addiction approach," Journal of Health Economics, Elsevier, vol. 17(4), pages 427-474, August.
  21. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
  22. Silvia Tiezzi, 2003. "Addiction and Smoking Behaviour in Italy," Department of Economics University of Siena 412, Department of Economics, University of Siena.
  23. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
  24. 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 449-54, October.
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