A Model of Addiction and Social Interactions

Abstract

Many consumer behaviors are both addictive and social. Understanding how these two phenomena interact informs basic models of human behavior, and matters for policymakers when the behavior is regulated. I develop a new model of demand that incorporates both addiction and social interactions and show that, under certain conditions, social interactions reinforce the effects of addiction. I also show how the dynamics introduced by addiction can solve the pernicious problem of identifying the causal effects of social interactions. I then use the model to illustrate a new and important identification problem for studies of social interactions: existing estimates cannot be used to draw welfare conclusions or even to deduce whether social interactions increase aggregate demand. Finally, I develop a method that allows researchers to distinguish between two common forms of social interactions and draw welfare conclusions. (JEL D11, H20) * I thank

The Long-Run Dynamics of Electricity Demand: Evidence from Municipal Aggregation

“…See Reif (2018) for additional details. Equation (A.7) shows that consumption in period t is a function of all future prices, all past prices, and the initial condition y 0 .…”

Dynamic Social Interactions and Health Risk Behavior

“…Social interactions, however, are modeled in a reduced form, by having agents' preferences depend on the average action in the economy, without a specification of the structure of interactions on the network. Differently than in our model, therefore, in Reiff (2018) agents need not anticipate the effects of their actions on those of their peers in their decision problems. Various theoretical properties of models of social interactions in linear dynamic economies are also studied in Özgür, Bisin, and Bramoullé (2019).…”

“…8 From a theoretical point of view the main novelty in the analysis of this paper consists in the study of the theoretical properties of equilibrium in an economy displaying both dynamic forward-looking agents and social interactions. In this respect, a related model is introduced in Reiff (2018), to characterize the theoretical properties of addiction in a dynamic forward-looking model with social interactions. Social interactions, however, are modeled in a reduced form, by having agents' preferences depend on the average action in the economy, without a specification of the structure of interactions on the network.…”

Price Isn’t Everything: Behavioral Response around Changes in Sin Taxes

“…Our empirical analyses evaluate the extent to which changes in cigarette consumption around tax changes are attributed to changes in prices. We formalize the potential theoretical role of non-price factors in the model of Reif (2018), which combines and generalizes the forward-looking features of the rational addiction model of Becker and Murphy (1988) and social interaction features in the spirit of Brock and Durlauf (2001).…”

“…of factors that evolve in the course of a tax change are naturally accommodated by this term. We follow Reif (2018) and represent individual utility (after substituting optimal 𝑐𝑐 𝑡𝑡 into the equation) as: The degree to which smokers actively choose to manage their addiction in a forward-looking manner remains a topic of debate. However, as documented in Reif (2018), convenient cigarette demand equations result from this framework regardless of whether consumers are myopic or forward-looking.…”