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

Dragone, Davide ; Raggi, Davide (2018) Testing Rational Addiction: When Lifetime is Uncertain, One Lag is Enough. Bologna: Dipartimento di Scienze economiche, p. 32. DOI 10.6092/unibo/amsacta/5827. In: Quaderni - Working Paper DSE (1119). ISSN 2282-6483.
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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.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Dragone, DavideUniversità di Bologna0000-0002-2725-4743
Raggi, DavideUniversità di Bologna0000-0002-0259-7117
Keywords
Euler equation, Saddle-path, Uncertain lifetime, Dynamic panel quasi-maximum likelihood, Smoking
Subjects
ISSN
2282-6483
DOI
Deposit date
03 Apr 2018 10:58
Last modified
22 May 2019 13:22
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