Is Addiction "Rational"? Theory and Evidence

Jonathan Gruber and Botond Koszegi

No 7507, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A standard model of addictive process is Becker and Murphy's rational addiction' model, which has the key empirical prediction that the current consumption of addictive goods should respond to future prices, and the key normative prediction that the optimal government regulation of addictive goods should depend only on their interpersonal externalities. While a variety of previous studies have supported this empirical contention, we demonstrate that these results are very fragile. We propose a new empirical test for the case of cigarettes, using state excise tax increases that have been legislatively enacted but are not yet effective, and monthly data on consumption. We find strong evidence that consumption drops when there are announced future tax increases, providing more robust support for the key empirical prediction of the Becker and Murphy model. But we also propose a new formulation of this model that makes only one change, albeit a major one: the incorporation of the inconsistent preferences which are likely to provide a much better platform for understanding the smoking decision. We find that with these preferences the model continues to yield the predictions for forward-looking behavior that have been tested by others and by ourselves. But it has strikingly different normative implications, as with these preferences optimal government policy should depend as well on the internalities' imposed by smokers on themselves. We estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case.

JEL-codes: H21 I18 (search for similar items in EconPapers)
Date: 2000-01
New Economics Papers: this item is included in nep-hea and nep-ind
Note: AG CH LS PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

Published as J. Gruber & B. Koszegi, 2001. "Is Addiction "Rational"? Theory and Evidence," The Quarterly Journal of Economics, vol 116(4), pages 1261-1303.

Downloads: (external link)
http://www.nber.org/papers/w7507.pdf (application/pdf)

Related works:
Journal Article: Is Addiction "Rational"? Theory and Evidence (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:7507

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w7507

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().