Addiction

Question 1

Becker and Murphy (1984)

Answer 1

Model of addiction - rational agent should plan his addiction by maximising utility
Consumers’ utility at a time t is affected by consumption of goods c and addictive goods a relative to the stock of past consumption(S) if a>S then you are beyond addicted to the good

Main predictions:

1. present consumption should be based on how addictive the good is
2. implies forward-looking behaviour, as they should consume less in order not to become trapped in the future if the good is addictive and expect a price increase
3. current consumption of the addictive good is inversely related to past prices and future prices = scope for policy intervention

• Addiction Revisited
  Harmful addiction is a consequence of 2 opposing preferences:
  1. reinforcement = an increase in utility with the consumption of the good e.g. drinking a beer
  2. tolerance = a reduction in marginal utility and decrease in overall utility due to a person’s overall stock of the addictive substance e.g. the more I drink alcohol, the less affected I get by it/ adaptation

Question 2

Gruber and Koszegi (2001)

Answer 2

Extend the BM (1984) model to explain not only for rational addictiveness - in terms of forward looking behaviour, but also for time inconsistency.
Results:
1. an increase in tax increased sales of cigarettes (to hoard them before they become more expensive in the future - forward-looking behaviour)
2. reduction in consumption, not to become trapped once the price increase is announced

but: issues
individuals may not be able to stick with a plan because of present bias, in underestimating its addictiveness! = time inconsistency.

Question 3

Laibson (2001)

Answer 3

Cue-theory of consumption e.g. the sound of ice cubes falling into a tumbler with whiskey, then the sound will elevate one’s desire for whiskey.

Model: two activities:
1. a primary activity (repeated over time, allows for conditioning effects)
2. alternative activity = changes every time, and the consumer learns of the activity through red or green signals.
If I am aware I will be triggered by red/green signals, as a rational individual, I will seek to avoid these cues

Question 4

O’Donoghue and Rabin (1999)

Answer 4

Implications of Self-Control Problems - whether a person is sophisticated = aware of self-control problems, or not = naive.
self-control problems make a person prone to over-consume addictive products.
In the stationary model, naifs are more likely to be hit than TCs, whether sophisticates hit more or less depends on the incentive effects

Question 5

Gine et al (2009)

Answer 5

Test the validity of commitment devices for stopping smoking of cigarettes.
CARES- committed action to reduce and end smoking

Three treatments:

1. Control Group
2. CARES: offered the commitment device, pledge own money that they would pass a cotinine test and if so would get money back, otherwise money donated to charity
3. Cue cards group: visually aversive pictures of the effects of smoking

Results:

1. subjects offered the CARES device were more likely to pass the test, long-term effect
2. no significant effect of the cues treatment

Policy implications: suggests that commitment contracts may be worth subsidising

Question 6

Addictive Goods Characteristics

Answer 6

1. Reinforcement = current marginal utility of consumption rises with the stock of past consumption, meaning ucs>0. Thus, the more a person has consumed the good in the past, the higher is marginal utility of consumption today (it is measured as a cross-partial effect).
   e. g., if you have never consumed heroin before then the marginal utility of consumption is likely to be lower than if you have previously consumed heroin and that past consumption affects how you ‘value’ current consumption.
2. Tolerance = the stock of past consumption lowers total utility (e.g. drugs, us<0) or increases total utility (e.g. exercise, us>0). The greater your history of consumption of a good, the lower is the marginal utility of consuming a unit today.
   e. g., an alcoholic may value one unit of alcohol today at a low level whereas in the past (in a pre-alcoholic state) one unit of alcohol may have been valued relatively highly.
3. Withdrawal means that stopping/lowering current consumption lowers utility - there is a positive marginal utility to current consumption (and that current utility from consuming other goods is lower when stopping consumption of the addictive good), uc>0. If we consider a person as having a utility function u(c,s,x) where x is other goods, then a better way to characterise withdrawal is to suppose ucx>0 – that is lowering the addictive good consumption lowers utility of consuming other goods today.
   1 and 2 oppose each other
   **See diagram: Consumption of an addictive good increases its utility. As stock increases, because of tolerancee, marginal utility decreases (slope becomes less steep). but because of reinforcement, doesn’t decrease as much)