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Is the Rational Addiction model inherently impossible to estimate?

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  • Laporte, Audrey
  • Dass, Adrian Rohit
  • Ferguson, Brian S.

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.

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  • Laporte, Audrey & Dass, Adrian Rohit & Ferguson, Brian S., 2017. "Is the Rational Addiction model inherently impossible to estimate?," Journal of Health Economics, Elsevier, vol. 54(C), pages 161-175.
    • Handle: RePEc:eee:jhecon:v:54:y:2017:i:c:p:161-175
    DOI: 10.1016/j.jhealeco.2016.12.005
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    Cited by:

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    2. 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.
    3. Piccoli, Luca & Tiezzi, Silvia, 2021. "Rational addiction and time-consistency: An empirical test," Journal of Health Economics, Elsevier, vol. 80(C).
    4. Dragone, Davide & Raggi, Davide, 2021. "Resolving the milk addiction paradox," Journal of Health Economics, Elsevier, vol. 77(C).
    5. Philip DeCicca & Donald Kenkel & Feng Liu & Hua Wang, 2017. "Behavioral Welfare Economics and FDA Tobacco Regulations," Advances in Health Economics and Health Services Research, in: Human Capital and Health Behavior, volume 25, pages 143-179, Emerald Group Publishing Limited.
    6. Robert Kaestner & Kevin Callison, 2018. "An Assessment of the Forward‐Looking Hypothesis of the Demand for Cigarettes," Southern Economic Journal, John Wiley & Sons, vol. 85(1), pages 48-70, July.
    7. Strulik, Holger, 2018. "Smoking kills: An economic theory of addiction, health deficit accumulation, and longevity," Journal of Health Economics, Elsevier, vol. 62(C), pages 1-12.
    8. D. Dragone & D. Raggi, 2018. "Testing Rational Addiction: When Lifetime is Uncertain, One Lag is Enough," Working Papers wp1119, Dipartimento Scienze Economiche, Universita' di Bologna.

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    More about this item

    Keywords

    Rational Addiction; Time discount rate; Inter-temporal optimization; Saddle-point dynamics; Econometric estimation; Monte carlo simulation;
    All these keywords.

    JEL classification:

    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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