Is addiction "rational"? Theory and evidence

This paper makes two contributions to the modeling of addiction. First, we provide new and convincing evidence that smokers are forward-looking in the ir smoking decisions, using state excise tax increases that have been legis latively enacted but are not yet effective, and monthly data on consumption . Second, we recognize the strong evidence that preferences with respect to smoking are time inconsistent, with individuals both not recognizing the t rue difficulty of quitting and searching for self-control devices to help t hem quit. We develop a new model of addictive behavior that takes as its st arting point the standard "rational addiction" model, but incorporates time -inconsistent preferences. This model also exhibits forward-looking behavio r, but it has strikingly different normative implications; in this case opt imal government policy should depend not only on the externalities that smo kers impose on others but also on the "internalities" imposed by smokers on themselves. We estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational a ddiction case.