A Theory of Addiction

We construct an inÞnite horizon consumption model and use it to deÞne and analyze addiction. Consumption is compulsive if it differs from what the individual would have chosen had commitment been available. A good is addictive if its consumption leads to more compulsive consumption of the same good in the future. We analyze two types of drug policies. A policy is prohibitive if it decreases the maximally feasible drug consumption. We show that prohibitive policies make agents better off and if they are not binding lead to higher drug demand. A price policy is one that increases the opportunity cost of drug consumption without changing the maximally feasible drug consumption. We show that price policies make the agent worse-off and decrease drug demand if the drug is a normal good. † This research was supported by grants from the National Science Foundation.