Rational Addiction and Alcohol Consumption: Evidence from the Nordic countries

The purpose of this paper is to test Becker and Murphy's (1988) rational addiction model on 35 years of time series data on alcohol consumption in each of the four Nordic countries: Denmark, Finland, Norway, and Sweden. The empirical relevance of rational addiction theory is assessed by examining the influence of past and future consumption and contemporaneous prices on current consumption. More precisely, the rational addiction model maintains that past and future consumption should have a positive effect and that current price should have the conventional negative effect on consumption. In addition, some parameter restrictions (regarding past and future prices and consumption) implied by rational addiction are tested. Finally, the own-price elasticities from rational addiction specifications are compared to those obtained from more conventional demand specifications which ignore addiction. Ignoring addiction may provide misleading estimates of the price sensitivity of alcohol consumption and this may, in turn, lead to underestimation of the effects of major changes in price policy such as those currently taking place in the Nordic countries.