Consumption of addictive substances poses a challenge to economic models of rational, forward-looking agents. This dissertation presents a theoretical and empiricalexamination of consumption of addictive goods.
The theoretical model draws on evidence from psychology and neurobiology toimprove on the standard assumptions used in intertemporal consumption studies. Imodel agents who may misperceive the severity of the future consequences from consumingaddictive substances and allow for an agent's environment to shape her preferencesin a systematic way suggested by numerous studies that have found craving tobe induced by the presence of environmental cues associated with past substance use.The behavior of agents in this behavioral model of addiction can mimic the patternof quitting and relapsing that is prevalent among addictive substance users.
Chapter 3 presents an empirical analysis of the Becker and Murphy (1988) modelof rational addiction using data on grocery store sales of cigarettes. This essay empiricallytests the model's predictions concerning consumption responses to future andpast price changes as well as the prediction that the response to an anticipated pricechange differs from the response to an unanticipated price change. In addition, Iconsider the consumption effects of three institutional changes that occur during thetime period 1996 through 1999.
