I’ll Never Forget My First Cigarette: A Revealed Preference Analysis of the “Habits as Durables” Model*

Abstract

We provide a revealed preference analysis of the “habits as durables” model. This approach avoids the need to impose a functional form on the underlying utility function. We show that our characterization is testable by means of linear programming methods, and we demonstrate its practical usefulness by means of an application to cigarette consumption using a Spanish household consumption data set. We find that the “habits as durables” model has better empirical fit in terms of predictive success compared to the “short memory habits” and life cycle models.

A Model of Addiction and Social Interactions

“…Prominent studies of addiction include Becker, Grossman, and Murphy (1994), Chaloupka (1991), Crawford (2010), Demuynck and Verriest (2013), and Gruber and Koszegi (2001). Despite the fact that these two phenomena often coexist-particularly among "sin goods"-they are usually examined in isolation.…”

Statistical inference for measures of predictive success

“…This is the rational addiction model put forward by Becker and Murphy (1988). The revealed preference characterization of this model was derived by Demuynck and Verriest (2013).…”

“…This dataset contains detailed information on consumed quantities and prices for a large sample of Spanish households. We refer to Browning and Collado (2001), Crawford (2010) and Demuynck and Verriest (2013) for a more detailed explanation of this data set. The observations range from 1985 to 1997 and are obtained on a quarterly basis.…”

“…2 See among many others Huyck et al (1997), Hey (1998), Willinger and Ziegelmeyer (2001), Hey and Lee (2005), Gächter and Riedl (2006), Wang et al (2010), Ehrhart et al (2007), Keser and Willinger (2007), Manzini et al (2010), Otto and Bolle (2011), Masatlioglu and Uler (2013). 3 See, among others, Crawford (2010), Demuynck and Verriest (2013) and Deb et al (2013) for applications. the predictive success measure is not a stochastic theory: the observations are either inside or outside the predicted set (see Hey (1998) for a discussion).…”

Demand analysis with partially observed prices

“…It would be straightforward to extend these ideas to an intertemporal setting using the approach of Browning (1989). It would also be possible to introduce intertemporal nonseparabilities following Crawford (2010) and Demuynck and Verriest (2013). This would allow for the possibility of observed or unobserved stocks of durables, the presence of which might also influence a consumer's decision to transact.…”