Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/177608
Authors: 
Dragone, Davide
Raggi, Davide
Year of Publication: 
2018
Series/Report no.: 
Quaderni - Working Paper DSE 1119
Abstract: 
The rational addiction model is usually tested by estimating a linear second-order difference Euler equation, which may produce unreliable estimates. We show that a linear first-order difference equation is a better alternative. This empirical specification is appropriate under the reasonable assumption that people are uncertain about the time of their death, it is based on the same structural assumptions used in the literature, and it retains all policy implications of the deterministic rational addiction model. It is also empirically convenient because it is simple, it allows using efficient estimation strategies that do not require instrumental variables, and it is robust to the possible non-stationarity of the data. As an application we estimate the demand for smoking in the US from 1970 to 2016, and we show that it is consistent with the rational addiction model.
Subjects: 
Euler equation
Saddle-path
Uncertain lifetime
Dynamic panel quasi-maximum likelihood
Smoking
JEL: 
Dll
D12
I12
L66
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by-nc/3.0/
Document Type: 
Working Paper

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