Rational addiction

The hypothesis that addictions (to heroin, tobacco, television, etc.) can be usefully modeled as a specific kind of rational, forward-looking, optimal consumption plans. The canonical theory is due to Kevin M. Murphy and Nobel Prize Winner Gary S. BeckerBecker, G. and K. Murphy (1988) A theory of rational addiction. Journal of Political Economy, 96, 675-700.] A theory of addictions in the broad sense---for example, to heroin, tobacco, religion, or food---the article tried to reconcile addictions with the standard rational choice framework of modern economics. Though controversial, the theoretical approach has become the standard approach to understanding addiction in economics, and a variety of extensions and modifications have been developed and published by other authors over the years.

The Becker and Murphy (1988) model

The original theory models addictions as the implementation of a forward-looking consumption plan made under full certainty and perfect information. "Addiction" is defined in a non-physiological sense as a causal effect of past consumption on current consumption, so that addictiveness is specific to individuals.The addict knows exactly how the good will affect him, and the reason he consumes more and more ("gets hooked") is that this is the pattern of consumption that maximizes his discounted utility. He knows that consuming the addictive good will change his preferences, altering both his future baseline level of utility and the marginal utility of consuming the addictive good in the future. For example, a modeled smoker realizes that smoking one more cigarette today will increase his desire to smoke tomorrow and decrease his future health. Rational choice amounts to comparing the benefit of smoking that cigarette to the total discounted costs of smoking that cigarette, including both the monetary cost of the cigarette, the health damages of that cigarette, and the costs of increased future smoking resulting from greater addiction. As a result, if cigarette taxes are credibly announced to double in one year's time, cigarette smokers will cut their smoking today, because the anticipated future costs of addiction to tobacco have gone up.

A sizeable econometric literature has developed on rational addiction, often reporting evidence in favor of rational addiction. For example, Gruber and Koszegi (2001) Gruber, J. and B. Koszegi (2001) Is addiction rational? Theory and evidence. Quarterly Journal of Economics 116: 4 1261-303.] show that the model's prediction that announced future tax increases should decrease current smoking is consistent with the evidence. Auld and Grootendorst (2004) Auld, M.C. and P. Grootendorst (2004) An empirical analysis of milk addiction. Journal of Health Economics, 23, 1117-33.] show, however, that the empirical version of the rational addiction model tends to produce spurious evidence of addictiveness when aggregate data are used.

Later extensions

Later extensions by other authors allow for uncertainty and a form of regret (you make a "rational bet" with positive expected return, but you're unlucky), cyclical consumption (interpreted as bingeing), chaotic consumption (fully deterministic but highly irregular consumption patterns strongly influenced by initial conditions), endogenous time preferences (where you know and rationally take into account how the drugs make you care less about your future), and quasi-hyperbolic discounting (the way the consumer takes the future into account makes him inconsistent over time - laying plans that he later deviates from). This latter theory is an example of an extension trying to shift the theory away from its laissez-faire and drug-liberal implications for policy. The fully rational "rational addiction models" are widely held to have the policy implication that drug users - even if they are unhappy on drugs - would be even more unhappy and worse off if they were forced off drugs. The government's policy - in this view - should be restricted to ensuring that people are well-informed and don't impose externalities on others (e.g., second-hand smoke).

References

See also

*Gary S. Becker
*Kevin M. Murphy
*Prospect theory