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Rational addiction and time consistency:an empirical test

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  • Pierani, P.; Tiezzi, S.;

Abstract

This paper deals with one of the main 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 time inconsistent preferences. The implication is that, even when forward†looking behavior is supported by data, the standard rational addiction equation cannot identify time consistency in preferences. In fact, we show that the possibility of testing for exponential versus non-exponential time discounting is nestled within the general rational addiction model. We propose a test that uses only the information obtained from the general specification and the price effects. We use a panel of Italian individuals to estimate a rational addiction model for tobacco. GMM estimators deal with errors in variables and unobserved heterogeneity. The results conform to the theoretical predictions. We find evidence that tobacco consumers are forward looking. Our test of time consistency does not reject the hypothesis that smokers in our sample actually discount exponentially.

Suggested Citation

  • Pierani, P.; Tiezzi, S.;, 2017. "Rational addiction and time consistency:an empirical test," Health, Econometrics and Data Group (HEDG) Working Papers 17/05, HEDG, c/o Department of Economics, University of York.
  • Handle: RePEc:yor:hectdg:17/05
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    Keywords

    rational addiction; general versus standard empirical specification; time consistency; GMM;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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