Talking Rationally About Rational Addiction

This paper reviews the rational addiction (RA) model of Becker and Murphy (1988) (BM) to demonstrate how its conclusions are based on assumptions about model parameters. The BM analysis emphasises the existence of an unstable steady state but the presumption of instability imposes strong restrictions on model parameters and is unlikely. Moreover, with two steady states (one stable, one unstable) the stable steady state may correspond to a lower level of addiction than the unstable one, the reverse of the BM finding. This implies that the effects of price changes on consumption, can be distinct from those given by BM. Also while the relative size of long-run and short-run effects depends on adjacent complementarity and addiction depreciation as BM suggest, short-run effects of a price change are generally greater than envisaged by BM. Other features of the RA model such as ‘cold turkey’ and ‘binge’ behaviour are reconsidered. The issue of detoxification is explicitly analysed here.