Rational Addiction Model Research Articles

The financial benefits of health engagement programs to life insurers

Life insurance companies, as equity stakeholders in policyholders’ lives, have incentives to mitigate their health risks. I introduce a framework that enables life insurers to evaluate the financial viability of developing and implementing health engagement programs. By leveraging a proprietary big database of health and mortality information from a large U.S. life insurer, I use machine learning techniques to quantify the benefits and use a rational addiction model to calculate the costs associated with these programs. The estimated net benefit available to the life insurer from the smoking cessation program is USD 87 million and the aggregate benefit from including other chronic conditions is USD 872 million. I explore the broader application of this framework in a general health policy context.

Lexicographic Ordering and Loss Aversion among Low-Income Farmers

As Richard Day explained, expected utility theory suffers from procedural irrationality. This and other problems are illustrated here in the context of decision-making among low-income farmers. Farmers in developing countries are commonly thought to underinvest in modern techniques because their low incomes make them especially risk averse. In addition to the procedural leap of faith, highly restrictive assumptions are needed to apply expected utility theory to the problem. Nor does expected utility theory, as usually prescribed, fit the narrative of loss aversion. The reader is introduced to a procedurally rational substitute called lexicographic safety first. The model is illustrated for the case of rice fertilization in the Philippines, and policy implications are drawn. To illustrate the potential appeal of lexicographic ordering for other applications involving thresholds, a lexicographic model of rational addiction is also provided.

An empirical analysis of e-cigarette addiction

ABSTRACT This paper examines the role of addiction in influencing the demand for e-cigarettes using the Nielsen Retail Scanner Data and the Nielsen Consumer Panel Data between 2012 and 2017. With a comparison of a myopic addiction model, a forward-looking model, and a rational addiction model, this paper tests whether the consumption of e-cigarettes is addictive and rational. Results from both the macro data and the microdata support the rational addictiveness of e-cigarettes. Applying an OLS method and an instrumental variable method in causal inference, results show that the long-run price elasticity estimates are larger than the estimates of the short-run price elasticity of demand for e-cigarettes. Estimates of both long-run and short-run elasticities are greater than one, −1.50 and −1.05, suggesting e-cigarette demand is elastic in both the long run and short run.

Effect of Cigarette Prices on Cigarette Consumption in Indonesia: Myopic and Rational Addiction Studies

This study analyzes the effect of cigarette prices on cigarette consumption in Indonesia. By using aggregate macro data on cigarette consumption (administrative data) for 2015-2020, estimated using OLS, 2SLS, GMM, and System-GMM, we found that cigarette prices have a negative and significant effect on cigarette consumption based on myopic and rational addiction models. The estimation results also confirm that cigarettes are inelastic products where price changes do not significantly impact cigarette consumption. It implies that the Government needs to significantly increase excise rates and minimum selling prices regularly to control cigarette consumption more effectively.

Rational Habit Formation: Experimental Evidence from Handwashing in India

We test the predictions of the rational addiction model, reconceptualized as rational habit formation, in the context of handwashing in rural India. To track handwashing, we design soap dispensers with timed sensors. We test for rational habit formation by informing some households about a future change in the returns to daily handwashing. Monitoring and incentives raise handwashing contemporaneously, and effects persist well after they end. In addition, people are rational about this habit formation: when they anticipate future monitoring, they increase their current handwashing. Average child weight and height increase for all study arms given soap dispensers. (JEL D12, D83, D91, I12, I18, J13, O12)

Rational addiction and time-consistency: An empirical test

This paper addresses one of the main empirical problems associated with rational addiction theory, namely, that its derived demand equation is not empirically distinguishable from those of models with forward-looking behavior but with time-inconsistent preferences. Using an encompassing general specification of the rational addiction model we derive a microfounded test of time-consistency. The test allows us to distinguish between time-consistent versus time-inconsistent naïve agents. The results obtained from a panel of Russian individuals conform to the theoretical predictions of the rational addiction model and the proposed test for time-consistency does not reject the hypothesis that Russian cigarette consumers are time-consistent.

Validity of Rational Addiction Model for Cinema Demand in Turkey

This study examines the demand for cinema in Turkey using economic and other explanatory variables. The study includes annual data for the period 2009-2017 on 26 sub-regions of Turkey and a dynamic panel data analysis was performed. Furthermore, the validity of the rational addiction model developed by Becker and Murphy (1988) has been investigated for the Turkish cinema market and the role of addiction in cinema demand has been discussed. Estimation results from the dynamic panel data model show that the number of screen and the share of domestic films in total films are an important component in explaining cinema demand. Furthermore, the results showed that the demand for cinema is compatible with the rational addiction model.

Resolving the milk addiction paradox

The milk addiction paradox refers to an empirical finding in which consumption of non-addictive commodities such as milk appears to be consistent with the theory of rational addiction. This paradoxical result seems more likely when consumption is persistent and with aggregate data. Using both simulated and real data, we show that the milk addiction paradox disappears when estimating the data using an AR(1) linear specification that describes the saddle-path solution of the rational addiction model, instead of the canonical AR(2) model. The AR(1) specification is able to correctly discriminate between rational addiction and simple persistence in the data, to test for the main features of rational addiction, and to produce unbiased estimates of the short and long-run elasticity of demand. These results hold both with individual and aggregated data, and they imply that the AR(1) model is a better empirical alternative for testing rational addiction than the canonical AR(2) model.

Evaluating the Effect of Soda Taxes Using a Dynamic Model of Rational Addiction

The obesity rate has grown to epidemic proportions in the United States. Recent scientific studies suggest that excess intake of sugar-sweetened beverages (SSBs) is one of the primary contributors to weight gain. One option to address the growing obesity epidemic is to discourage SSB consumption through fiscal policies such as excising a soda tax. In this paper, we apply the Becker-Murphy model of rational addiction to present evidence that consumers are rationally addicted to soda consumption. Motivated by the evidence, we build a dynamic structural model to quantify the impact of soda taxes on soda purchases and consumption and study the role of addiction in influencing this impact. Using the parameter estimates, we conduct counterfactual analyses based on realistic policy scenarios and evaluate how different tax policies would affect soda purchases. The policy experiments indicate that imposing a soda tax of 1 cent per ounce would reduce soda consumption by 28.3% and addiction level by 31.7%. We find that 20.6% of the reduction in consumption is due to the reduction in the addiction level. We further investigate how these taxes affect consumer and social welfare through a change in addiction level. We find that addiction plays a critical role because a mild reduction in addiction level in the Berkeley tax scenario (1 cent per ounce on regular soda) benefits consumer and social welfare; however, in the Philadelphia tax scenario (1.5 cents per ounce on regular and diet sodas), the reduction in addiction level is too large, and both consumer and social welfare are worse off than before.

Nonconvex consumer preferences, compulsive eating, and food addiction

PurposeEpisodes of compulsive eating may lead to addiction. Changing relative prices does not always work for many food addicts turned overweight or obese individuals. This paper points to when such situations may arise and how they can be remedied.Design/methodology/approachWe modify the standard neoclassical economics model assumption of indifference curves being convex to the origin. It becomes violated in situations when compulsive eaters become food addicts. As a result of that, the assumption of the concave (quasi-concave) utility function is violated too. We also introduce the possibility that compulsive eaters may have stable but nonconstant preferences.FindingsMost important finding of our model is that a smooth dynamic path to addiction, caused by habit, disappears. Hence, the ability for smooth adjustment to relative price changes due to policies targeting obesity may not be applicable for a compulsive addict. We postulate the existence of thresholds past in which irreversible harm to addicted overeaters may occur. Reaching such states implies that no economic tools at our disposal could reverse the harm, which, in turn, deem that many policies directed at altering relative prices are ineffective in correcting overeating addiction and its consequences.Social implicationsEven if we believe in consumer sovereignty, it is possible to shape consumer behavior via policy actions, including the behavior of extremum seekers turned addicts. The public policy of obesity should consider, in this case, its social cost.Originality/valueNo prior research has considered food addiction in light of compulsive eating caused by extremum-seeking behavior. Addiction correcting food policies always relied on either rational or myopic addiction models.

A Dynamic Model of Rational Addiction with Stockpiling and Learning: An Empirical Examination of E-cigarettes

Current regulations on e-cigarettes are minimal compared with cigarette regulations, despite their growing popularity globally. Advocates of e-cigarettes claim that they aid in ceasing smoking habits. However, leaving e-cigarettes unregulated has raised growing health concerns. Policymakers in several countries, including the United States and those in Europe, are considering and experimenting with policy interventions. To evaluate current policies and implement potential regulations on e-cigarettes, policymakers must understand the impact of e-cigarettes on consumers’ smoking behaviors. To address this issue, we construct a dynamic structural model that incorporates consumers’ purchases and consumption behaviors of both cigarettes and e-cigarettes. The results from our proposed model indicate that consumption of e-cigarettes promotes, rather than counteracts, smoking. This is because the less costly e-cigarettes incentivize consumers to build their addiction to nicotine, which, in return, increases future consumption of both cigarettes and e-cigarettes. This finding calls for regulations on e-cigarettes. We then conduct counterfactual analyses to evaluate two policy regulations on e-cigarettes: (1) e-cigarette taxes and (2) price regulation. Because both of these policies have been discussed extensively in both the United States and many countries in the European Union, results of our policy simulations address these policy debates. We find that both are effective in reducing overall consumption of cigarettes and e-cigarettes. We also examine the role of consumers’ heterogeneity on the simulation results as well as the policy implications. We conclude with future research directions, such as inclusion of social influence and cross-selling marketing. This paper was accepted by Matthew Shum, marketing.

Looking at the taxation effect on cross-state smuggling using rational addiction models

Purpose The purpose of this paper is to show how the taxation effect on cross-state smuggling can be a valid instrumental variable for lagged and future consumption together with the local price series. Design/methodology/approach On the same grounds, the authors raise the question using the rational-addiction model by noticing that the neighboring price differentials really capture the possible smuggling or bootlegging effects. Findings Moreover, the authors look into the extended model to test the key condition that the expected future financial consequences will affect the current consumptions. Originality/value This supports the rational-addiction model, which can be used to plan the taxation for the forward-looking consumptions.

Does time preference affect smoking behavior? A dynamic panel analysis

The association between time preference and smoking behavior forms supportive evidence for the rational addiction model. Individuals with a high discount rate place more weight on the immediate satisfaction of smoking than on its future consequences. However, the endogenous time preference model proposes an alternative explanation, that is, smoking behavior affects time preference. Since previous studies have overlooked it, using a dynamic panel analysis, I analyze the effect of time preferences on smoking behavior, while controlling for the effect of past smoking behavior. I use nationwide micro panel data from Japan and present three main findings. First, as in the previous literature, using a probit model, I find positive associations between time preferences and smoking behavior. Second, using a dynamic panel analysis, I find that time preferences affect smoking behavior significantly for women, but not for men. Third, male smokers who have a low discount rate are more likely to want to quit or reduce smoking behavior. This result implies that, while male smokers are concerned about the future consequences of smoking, they cannot manage to quit.

Testing Rational Addiction: When Lifetime is Uncertain, One Lag is Enough

The rational addiction model is usually tested by estimating a linear second-order difference Euler equation, which may produce unreliable estimates. We show that a linear first-order difference equation is a better alternative. This empirical specification is appropriate under the reasonable assumption that people are uncertain about the time of their death, it is based on the same structural assumptions used in the literature, and it retains all policy implications of the deterministic rational addiction model. It is also empirically convenient because it is simple, it allows using efficient estimation strategies that do not require instrumental variables, and it is robust to the possible non-stationarity of the data. As an application, we estimate the demand for smoking in the US from 1970 to 2016, and we show that it is consistent with the rational addiction model.

Are Adolescents Addicted to Smartphones?

This empirical study shows how people use their smartphones by employing the rational addiction model of Becker and Murphy. The analysis uses micro-level panel data on the monthly usage of smartphone applications (so-called “apps”) derived from 10,337 users in South Korea, from 2012 to 2016. The authors find that smartphone users are “addicted” to mobile phone apps, in the sense that their prior usage has significantly influenced their current use. Nonetheless, people in the sample seem to use their smartphones in a forward-looking manner, adjusting consumption over time to maximize their utility. On the other hand, the study's result rejects the conventional belief that younger individuals behave more myopically than older ones. Furthermore, only the mother's smartphone use was found to generate a positive externality for her children.

The welfare implications of addictive substances: A longitudinal study of life satisfaction of drug users

This paper provides an empirical test of the rational addiction model, used in economics to model individuals’ consumption of addictive substances, versus the utility misprediction model, used in psychology to explain the discrepancy between people’s decision and their subsequent experiences. By exploiting a unique data set of disadvantaged Australians, we provide longitudinal evidence that a drop in life satisfaction tends to precede the use of illegal/street drugs. We also find that the abuse of alcohol, the daily use of cannabis and the weekly use of illegal/street drugs in the past 6 months relate to lower current levels of life satisfaction. This provides empirical support for the utility misprediction model. Further, we find that the decrease in life satisfaction following the consumption of illegal/street drugs persists 6 months to a year after use. In contrast, the consumption of cigarettes is unrelated to life satisfaction in the close past or the near future. Our results, though only illustrative, suggest that measures of individual’s subjective wellbeing should be examined together with data on revealed preferences when testing models of rational decision-making.

The Welfare Implications of Addictive Substances: A Longitudinal Study of Life Satisfaction of Drug Users

This paper provides an empirical test of the rational addiction model, used in economics to model individuals’ consumption of addictive substances, versus the utility misprediction model, used in psychology to explain the discrepancy between people’s decision and their subsequent experiences. By exploiting a unique data set of disadvantaged Australians, we provide longitudinal evidence that a drop in life satisfaction tends to precede the use of illegal/street drugs. We also find that the abuse of alcohol, the daily use of cannabis and the weekly use of illegal/street drugs in the past 6 months relate to lower current levels of life satisfaction. This provides empirical support for the utility misprediction model. Further, we find that the decrease in life satisfaction following the consumption of illegal/street drugs persists 6 months to a year after use. In contrast, the consumption of cigarettes is unrelated to life satisfaction in the close past or the near future. Our results, though only illustrative, suggest that measures of individual’s subjective well-being should be examined together with data on revealed preferences when testing models of rational decision-making.

Habit Formation and Rational Addiction: A Field Experiment in Handwashing

We test the main predictions of the rational addiction model, reconceptualized as rational habit formation, in the context of handwashing. To track habit formation, we design soap dispensers with timed sensors. We test for rational habit formation by informing some households about a future change in the returns to daily handwashing. Child weight and height increase for all households with dispensers. Monitoring and incentives raise handwashing contemporaneously, and effects persist well after they end. Anticipation of future monitoring further raises handwashing: individuals internalize handwashing's habitual nature and accumulate stock. Our results inform policy design around the adoption of healthy behaviors.

The Welfare Implications of Addictive Substances: A Longitudinal Study of Life Satisfaction of Drug Users

This paper provides an empirical test of the rational addiction model, used in economics to model individuals' consumption of addictive substances, versus the utility misprediction model, used in psychology to explain the discrepancy between people's decision and their subsequent experiences. By exploiting a unique data set of disadvantaged Australians, we provide longitudinal evidence that a drop in life satisfaction tends to precede the use of illegal/street drugs. We also find that the abuse of alcohol, the daily use of cannabis and the weekly use of illegal/street drugs in the past 6 months relate to lower current levels of life satisfaction. This provides empirical support for the utility misprediction model. Further, we find that the decrease in life satisfaction following the consumption of illegal/street drugs persists 6 months to a year after use. In contrast, the consumption of cigarettes is unrelated to life satisfaction in the close past or the near future. Our results, though only illustrative, suggest that measures of individual's subjective wellbeing should be examined together with data on revealed preferences when testing models of rational decision-making.

Is the Rational Addiction model inherently impossible to estimate?

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.