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by Michael Grossman Frank Chaloupka Ismail Sirtalan National
Bureau of Economic Research, Inc. This paper aims to refine
and enrich the empirical literature dealing with the sensitivity of alcohol
consumption and excessive consumption to differences in the prices of
alcohol beverages. The main refinement pertains to the incorporation of
insights provided by a model of rational addictive behavior which emphasizes
the interdependency of past, current, and future consumption of an addictive
good. The data employed in this study consist of a U.S. panel whose members
range in age from seventeen through twenty-seven. Since the prevalence
of alcohol dependence and abuse is highest in this age range, addictive
models of alcohol consumption may be more relevant to this sample than
to a representative sample of the population of all ages. We find that
alcohol consumption by young adults is addictive in the sense that increases
in past or future consumption cause current consumption to rise. The positive
and significant future consumption effect is consistent with the hypothesis
of rational addiction and inconsistent with the hypothesis of myopic addiction.
The long-run elasticity of consumption with respect to the price of beer
is approximately 60 percent larger than the short-run price elasticity
and twice as large as the elasticity that ignores addiction.
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