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.

Davide Dragone, D.r. (2018). Testing Rational Addiction: When Lifetime is Uncertain, One Lag is Enough. Bologna : Dipartimento di Scienze Economiche, Universita di Bologna.

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

Davide Dragone
;
Davide raggi
2018

Abstract

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.
2018
32
Davide Dragone, D.r. (2018). Testing Rational Addiction: When Lifetime is Uncertain, One Lag is Enough. Bologna : Dipartimento di Scienze Economiche, Universita di Bologna.
Davide Dragone , Davide raggi
File in questo prodotto:
File Dimensione Formato  
SSRN-id3155099.pdf

accesso aperto

Tipo: Versione (PDF) editoriale
Licenza: Licenza per accesso libero gratuito
Dimensione 1.04 MB
Formato Adobe PDF
1.04 MB Adobe PDF Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/675830
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact