Is Addiction “Rational”? Theory and Evidence
Jonathan Gruber,Botond Koszegi +1 more
TL;DR: In this paper, a new and convincing evidence that smokers are forward-looking in their smoking decisions, using state excise tax increases that have been legislatively enacted but are not yet effective, and monthly data on consumption.
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Abstract: This paper makes two contributions to the modeling of addiction. First, we provide new and convincing evidence that smokers are forward-looking in their smoking decisions, using state excise tax increases that have been legislatively enacted but are not yet effective, and monthly data on consumption. Second, we recognize the strong evidence that preferences with respect to smoking are time inconsistent, with individuals both not recognizing the true dife culty of quitting and searching for self-control devices to help them quit. We develop a new model of addictive behavior that takes as its starting point the standard “ rational addiction” model, but incorporates time-inconsistent preferences. This model also exhibits forward-looking behavior, but it has strikingly different normative implications; in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the “ internalities” imposed by smokers on themselves. We estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case.
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Figures
Table 4: Effect of Tax Announcement on Smoking - Fixed Effects Models Aggregate Sales Data Natality Consumption Data 
Table 7: Summary of price responses this period next period 
Table 6: Optimal taxes for various values of d and A*S 
Table 2: Length of Time Between Enactment and Effective Dates of Excise Tax Increases 1973-1996 1982-1996 1989-1996 
Table 3: Means of the Analysis Samples
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Golden Eggs and Hyperbolic Discounting
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A Theory of Rational Addiction
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