Uncovering the Behavioral Implications of the Rational Addiction Assertion

Abstract

AbstractThe consumption functions in Becker and Murphy's (1988) rational addiction theory are subjected to an extensive comparative dynamics analysis. They are shown to be intrinsically characterized by a symmetric and positive semidefinite matrix of generalized Slutsky-like terms. In contrast, the typical comparative dynamics expressions, comprised of the individual partial derivatives of the consumption functions with respect to the parameters and state variables, do not possess refutable implications under the basic assumptions of the theory. Only with additional sufficiently strong assumptions, of which some are identified here, can they be signed.