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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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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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PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2

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  8. Silvia Tiezzi, 2003. "Addiction and Smoking Behaviour in Italy," Department of Economics University of Siena 412, Department of Economics, University of Siena.
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  11. 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.
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  13. 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.
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  17. Peter J. Hammond, 1976. "Changing Tastes and Coherent Dynamic Choice," Review of Economic Studies, Oxford University Press, vol. 43(1), pages 159-173.
  18. Chaloupka, Frank, 1991. "Rational Addictive Behavior and Cigarette Smoking," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 722-42, August.
  19. 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.
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  21. 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.
  22. Franses, Ph.H.B.F., 1999. "How to deal with intercept and trend in pratical cointegration analysis?," Econometric Institute Research Papers EI 9904-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  23. 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.
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