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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
Contact details of provider: Postal: PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2
Phone: (250)721-6197
Fax: (250)721-6214
Web page: http://web.uvic.ca/econ

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  1. Hammond, Peter J, 1976. "Changing Tastes and Coherent Dynamic Choice," Review of Economic Studies, Wiley Blackwell, vol. 43(1), pages 159-73, February.
  2. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1990. "An Empirical Analysis of Cigarette Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 61, Chicago - Center for Study of Economy and State.
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  4. Olekalns, Nilss & Bardsley, Peter, 1996. "Rational Addiction to Caffeine: An Analysis of Coffee Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1100-1104, October.
  5. Dewenter, Ralf, 2003. "Rational Addiction to News?," Working Paper 2/2003, Helmut Schmidt University, Hamburg.
  6. Samuel Cameron, 1999. "Rational addiction and the demand for cinema," Applied Economics Letters, Taylor & Francis Journals, vol. 6(9), pages 617-620.
  7. 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.
  8. James G. MacKinnon & Alfred A. Haug & Leo Michelis, 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Working Papers 1996_07, York University, Department of Economics.
  9. 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.
  10. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  11. 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.
  12. 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.
  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. Michael Grossman & Frank J. Chaloupka & Charles C. Brown, 1996. "The Demand for Cocaine by Young Adults: A Rational Addiction Approach," NBER Working Papers 5713, National Bureau of Economic Research, Inc.
  15. 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.
  16. 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..
  17. Chaloupka, Frank, 1991. "Rational Addictive Behavior and Cigarette Smoking," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 722-42, August.
  18. 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.
  19. 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.
  20. Silvia Tiezzi, 2003. "Addiction and Smoking Behaviour in Italy," Department of Economics University of Siena 412, Department of Economics, University of Siena.
  21. 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.
  22. 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.
  23. 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.
  24. 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.
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