Title
Multiple equilibria and indifference-threshold points in a rational addiction modelMultiple equilibria and indifference-threshold points in a rational addiction model
Author
Faculty/Department
Faculty of Applied Economics
Research group
Economics
Publication type
article
Publication
New York,
Subject
Economics
Mathematics
Source (journal)
Central European journal of operations research. - New York
Volume/pages
21(2013):3, p. 507-522
ISSN
1435-246X
ISI
000322669300001
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
Becker and Murphy (J Polit Econ 96(4):675-700, 1988) have established the existence of unstable steady states leading to threshold behavior for optimal consumption rates in intertemporal rational addiction models. In the present paper a simple linear-quadratic optimal control model is used to illustrate how their approach fits into the framework of multiple equilibria and indifference-threshold points. By changing the degree of addiction and the level of harmfulness we obtain a variety of behavioral patterns. In particular we show that when the good is harmful as well as very addictive, an indifference-threshold point, also known in the literature as a Skiba point, separates patterns converging to either zero or maximal consumption, where the latter occurs in the case of a high level of past consumption. This implicitly shows that an individual needs to be aware in time of these characteristics of the good. Otherwise, he/she may start consuming so much that in the end he/she is totally addicted.
E-info
https://repository.uantwerpen.be/docman/iruaauth/b27cc9/e2d5330.pdf
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