Becker, Grossman, and Murphy (1991) on Rational Addiction

Gary S. Becker, Michael Grossman and Kevin Murphy, “Rational Addiction and the Effect of Price on Consumption [pdf].” American Economic Review 237-241, May 1991.

• This paper provides a capsule summary of what might be considered the non-behavioral model of addiction, the approach to addictive behavior based on full-on standard rational economic choice; the original, fuller treatment is Becker and Murphy (1988). (A still earlier precursor is Stigler and Becker (1977), "De Gustibus Non Est Disputandum.") 

• A consumer's preferences can be described by the utility function U(t) = u[c(t), S(t), y(t)], where y is a non-addictive good, c is an addictive good, and S is the stock of addictive capital; t represents the time period. c(t), therefore, is consumption of the addictive good in time period t. 

• Reinforcement: the higher the stock of addictive capital, the higher the current consumption of the addictive good. The stock of addictive capital S comprises past consumption of the addictive good, though this stock depreciates at a constant per period rate, so if someone chooses to go cold turkey, S would wither away over time.

• Rationality here, as elsewhere, means having fixed, forward-looking preferences. 

• There exists a low-consumption, unstable steady state, as well as a high-consumption (addicted), stable steady state. At a steady state, each period's chosen (optimal) consumption of the addictive good (c) equals the depreciation in S, so that the next period, the consumer wakes up with an unchanged stock of addictive capital -- and hence once again chooses the same consumption c, and so on.

• Implications: long-run elasticities are greater in magnitude than short-run elasticities; current consumption responds to anticipated future price changes; past, current, and future consumption are mutually complementary. These implications can be tested, and the tests (generally on legal addictive behaviors such as smoking) tend to support rational addiction as opposed to myopic (non-forward-looking) behavior. 

• The government cannot help rational addicts by making it harder for them to procure their drug of choice. They freely chose to become addicted, knowing the consequences of their behavior. If they had to do it all over again, they would make the same choices. Addicts might not be very happy, but their other choices were even less palatable to them than was becoming an addict. They probably have high discount rates, however, as the future costs of current consumption of the addictive good did not weigh heavily in their decisions.