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Some Fundamental Problems in Becker, Grossman and Murphy's Implementation of Rational Addiction Theory

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Abstract

The econometric implementation of rational addiction theory has been highly influenced by Becker, Grossman and Murphy (BGM). They specify an Euler equation where current consumption is determined by current price and past and future consumption. This model is claimed to be able to discriminate between rational addictive, myopic addictive, and non-addictive behavior. However, as demonstrated in this paper, the coefficients of the Euler equation are not structural parameters. Provided that two implausible assumptions do not hold, the Euler equation coefficients for the rational addict are shown to be non-constant. But even when these assumptions are assumed to be valid, the coefficients of the Euler equation will vary under the alternative hypothesis of myopic addiction. Moreover, and in contrast to the common interpretation, BGM's non-addicted consumer is influenced by past consumption, implying that a rational and a myopic non-addict behave differently. These problems makes it unclear how analyses based on the BGM approach can support, or reject, rational addiction theory.

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  • Knut R. Wangen, 2004. "Some Fundamental Problems in Becker, Grossman and Murphy's Implementation of Rational Addiction Theory," Discussion Papers 375, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:375
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    2. Biørn, Erik, 2009. "Modelling Addiction in Life-Cycle Models: Revisiting the Treatment of Latent Stocks and Other Unobservables," Memorandum 26/2009, Oslo University, Department of Economics.
    3. Miljkovic, Dragan & Nganje, William & de Chastenet, Helene, 2008. "Economic factors affecting the increase in obesity in the United States: Differential response to price," Food Policy, Elsevier, vol. 33(1), pages 48-60, February.
    4. Skokov, R. Yu. & Brizhak, O. V., 2020. "Consumption of addictive goods in Russian regions and its impact on the quality of human capital," R-Economy, Ural Federal University, Graduate School of Economics and Management, vol. 6(1), pages 50-60.

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    Keywords

    Rational addiction; Euler equation;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • I10 - Health, Education, and Welfare - - Health - - - General

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