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Rational Addictive Behavior under Uncertainty

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  • Zaifu Yang
  • Rong Zhang

Abstract

We develop a new model of addictive behavior that takes as a starting point the classic rational addiction model of Becker and Murphy, but incorporates uncertainty. We model uncertainty through the Wiener stochastic process. This process captures both random events such as anxiety, tensions and environmental cues which can precipitate and exacerbate addictions, and those sober and thought-provoking episodes that discourage addictions. We derive closed-form expressions for optimal (and expected optimal) addictive consumption and capital trajectories and examine their global and local properties. Our theory provides plausible explanations of several important patterns of addictive behavior, and has novel implications for addiction control policy.

Suggested Citation

  • Zaifu Yang & Rong Zhang, 2014. "Rational Addictive Behavior under Uncertainty," Discussion Papers 14/12, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:14/12
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    More about this item

    Keywords

    Rational Addiction; Stochastic Control; Uncertainty;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • I10 - Health, Education, and Welfare - - Health - - - General
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

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