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Link to original content: https://doi.org/10.1007/s10100-012-0260-9
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Multiple equilibria and indifference-threshold points in a rational addiction model

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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.

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Authors and Affiliations

  1. Carnegie Mellon University, H. John Heinz III College, 5000 Forbes Avenue, Pittsburgh, PA, 15213-3890, USA

    Jonathan P. Caulkins

  2. Department for Operations Research and Control Systems, Institute for Mathematical Methods in Economics, Vienna University of Technology, Argentinierstr. 8, 1040, Vienna, Austria

    Gustav Feichtinger & Andrea Seidl

  3. Department of Business Administration, University of Vienna, Bruennerstr. 72, 1210, Vienna, Austria

    Richard F. Hartl & Andreas J. Novak

  4. Department of Econometrics and Operations Research and Center, Tilburg University, P.O. Box 90153, 5000 LE, Tilburg, The Netherlands

    Peter M. Kort

  5. Department of Economics, University of Antwerp, Prinsstraat 13, 2000, Antwerp, Belgium

    Peter M. Kort

Authors
  1. Jonathan P. Caulkins
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  2. Gustav Feichtinger
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  3. Richard F. Hartl
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  4. Peter M. Kort
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  5. Andreas J. Novak
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  6. Andrea Seidl
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Correspondence to Gustav Feichtinger.

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Caulkins, J.P., Feichtinger, G., Hartl, R.F. et al. Multiple equilibria and indifference-threshold points in a rational addiction model. Cent Eur J Oper Res 21, 507–522 (2013). https://doi.org/10.1007/s10100-012-0260-9

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  • DOI: https://doi.org/10.1007/s10100-012-0260-9

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