Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/245886
Year of Publication: 
2020
Series/Report no.: 
Quaderni - Working Paper DSE No. 1144
Publisher: 
Alma Mater Studiorum - Università di Bologna, Dipartimento di Scienze Economiche (DSE), Bologna
Abstract: 
The milk addiction paradox refers to an empirical finding in which commodities that are typically considered to be non addictive, such as milk, appear instead to be addictive. This result seems more likely when there is persistence in consumption and when using aggregate data, and it suggests that the AR(2) model typically used in the addiction literature is prone to produce spurious result in favor of rational addiction. Using both simulated and real data, we show that the milk addiction paradox disappears when estimating the data using an AR(1) linear specification that describes the saddle-path solution of the rational addiction model. The AR(1) specification is able to correctly discriminate between rational addiction and simple persistence in the data, to test for the main features of rational addiction, and to produce unbiased estimates of the short and long-run elasticity of demand. These results hold both with individual and aggregated data, and they suggest that, for testing rational addiction, the AR(1) model is a better empirical alternative than the canonical AR(2) model.
Subjects: 
Adjacent complementarity
Forward-looking behavior
Milk addiction
Rational addiction
Spurious correlation
JEL: 
D11
D12
I12
L66
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Working Paper

Files in This Item:
File
Size
842.23 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.