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Is the Rational Addiction model inherently impossible to estimate?

Audrey Laporte, Adrian Rohit Dass and Brian Ferguson

Journal of Health Economics, 2017, vol. 54, issue C, 161-175

Abstract: The Rational Addiction (RA) model is increasingly often estimated using individual level panel data with mixed results; in particular, with regard to the implied rate of time discount. This paper suggests that the odd values of the rate of discount frequently found in the literature may in fact be a consequence of the saddle-point dynamics associated with individual level inter-temporal optimization problems. We report the results of Monte Carlo experiments estimating RA-type difference equations that seem to suggest the possibility that the presence of both a stable and an unstable root in the dynamic process may create serious problems for the estimation of RA equations.

Keywords: Rational Addiction; Time discount rate; Inter-temporal optimization; Saddle-point dynamics; Econometric estimation; Monte carlo simulation (search for similar items in EconPapers)
Date: 2017
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Working Paper: Is the Rational Addiction model inherently impossible to estimate? (2016) Downloads
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