title: Is the Rational Addiction model inherently impossible to estimate?
abstract: The Rational Addiction (RA) model is increasingly often estimated using individual level panel data with mixed results; in particular, with regard to the implied rate of time discount. This paper suggests that the odd values of the rate of discount frequently found in the literature may in fact be a consequence of the saddle-point dynamics associated with individual level inter-temporal optimization problems. We report the results of Monte Carlo experiments estimating RA-type difference equations that seem to suggest the possibility that the presence of both a stable and an unstable root in the dynamic process may create serious problems for the estimation of RA equations.
authors.affiliation: Institute of Health Policy, Management and Evaluation, Health Sciences Building, University of Toronto, 155 College Street, 4th floor, Toronto, Ontario, M5T 3M6, Canada; Canadian Centre for Health Economics, Health Sciences Building, University of Toronto, 155 College Street, suite 440, Toronto, Ontario, M5T 3M6, Canada. Electronic address: audrey.laporte@utoronto.ca.
authors.forename: Audrey
authors.initials: A
authors.lastname: Laporte
authors.affiliation: Institute of Health Policy, Management and Evaluation, Health Sciences Building, University of Toronto, 155 College Street, 4th floor, Toronto, Ontario, M5T 3M6, Canada; Canadian Centre for Health Economics, Health Sciences Building, University of Toronto, 155 College Street, suite 440, Toronto, Ontario, M5T 3M6, Canada.
authors.forename: Adrian Rohit
authors.initials: AR
authors.lastname: Dass
authors.affiliation: Canadian Centre for Health Economics, Health Sciences Building, University of Toronto, 155 College Street, suite 440, Toronto, Ontario, M5T 3M6, Canada; Department of Economics, University of Guelph, 50 Stone Rd E, Guelph, Ontario, N1G 2W1, Canada.
authors.forename: Brian S
authors.initials: BS
authors.lastname: Ferguson
mesh_terms: D016739:Behavior, Addictive / Q000191:economics / Q000453:epidemiology* / Q000523:psychology; D005260:Female; D006801:Humans; D008297:Male; D015233:Models, Statistical; D009010:Monte Carlo Method
keywords: Econometric estimation; Inter-temporal optimization; Monte carlo simulation; Rational Addiction; Saddle-point dynamics; Time discount rate