Harmful Addiction†

We construct an infinite horizon model of harmful addiction. Consumption is compulsive if it differs from what the individual would have chosen had commitment been available. A good is addictive if its consumption leads to more compulsive consumption of the same good. We analyze the welfare implications of drug policies and find that taxes on drugs decrease welfare while prohibitive policies may increase welfare. We also analyze the agent’s demand for voluntary commitment (“rehab”). For appropriate parameters the model predicts a cycle of addiction where the agent periodically checks into rehab. Between these visits his drug consumption increases each period. † This research was supported by grants SES9911177, SES0236882, SES9905178 and SES0214050 from the National Science Foundation. The authors thank the editor and two anonymous referees for helpful comments.