Dissertations, Theses, and Capstone Projects

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Michael Grossman

Committee Members

Theodore Tovce

Robert Kaestner

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This study is an empirical application of the rational addiction theory to the consumption of alcohol and heavy drinking. The model, developed by Becker and Murphy, emphasizes the interdependency of past current and future consumption of an addictive good. This is different than myopic addiction models where the current consumption is dependent on past consumption but not on future consumption. The data employed is the Monitoring the Future Survey, a panel representative of young adults between seventeen and twenty-seven years old, over a period of fourteen years from 1976 to 1989. Since alcohol abuse is most prevalent in this age group with significant adverse effects, this sample may be a more relevant choice than a representative sample of all ages. Because of the endogenous nature of the past and future consumption, two stage least squares method is used to estimate alcohol demand function. I find that the consumption of alcohol is addictive in the sense that increases in past or future consumption cause the current consumption to rise. Since the coefficient on the future consumption is positive and significant, the rational addiction model is more appropriate than the myopic addiction model. The long-run elasticity of consumption with respect to price of beer is larger than the short-run elasticity, which is expected in the context of the rational addiction theory.


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