Solving the Milk Addiction Paradox

Dragone, Davide ; Raggi, Davide (2020) Solving the Milk Addiction Paradox. Bologna: Dipartimento di Scienze economiche, p. 24. DOI 10.6092/unibo/amsacta/6353. In: Quaderni - Working Paper DSE (1144). ISSN 2282-6483.
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Abstract

The milk addiction paradox refers to an empirical finding in which commodities that are typically considered to be non addictive, such as milk, appear instead to be addictive. This result seems more likely when there is persistence in consumption and when using aggregate data, and it suggests that the AR(2) model typically used in the addiction literature is prone to produce spurious result in favor of rational addiction. Using both simulated and real data, we show that the milk addiction paradox disappears when estimating the data using an AR(1) linear specification that describes the saddle-path solution of the rational addiction model. The AR(1) specification is able to correctly discriminate between rational addiction and simple persistence in the data, to test for the main features of rational addiction, and to produce unbiased estimates of the short and long-run elasticity of demand. These results hold both with individual and aggregated data, and they suggest that, for testing rational addiction, the AR(1) model is a better empirical alternative than the canonical AR(2) model.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Dragone, DavideUniversità di Bologna0000-0002-2725-4743
Raggi, DavideUniversità di Bologna0000-0002-0259-7117
Keywords
Adjacent complementarity, Forward-looking behavior, Milk addiction, Rational addiction, Spurious correlation
Subjects
ISSN
2282-6483
DOI
Deposit date
06 Apr 2020 10:00
Last modified
06 Apr 2020 10:00
URI

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