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Modelling Addictive Consumption: Some Theoretical and Econometric Issues

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Abstract

This paper addresses some theoretical and econometric aspects of modelling addictive consumption. We show that the solution to the optimisation problem leads to a specification of the reduced form equation which is different from what is found in the literature. We also demonstrate that it is also valid to apply OLS to estimate this reduced form equation and those used in the literature although the underlying variables are integrated.

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