Scandinavian Working Papers in Economics

HERO Online Working Paper Series,
University of Oslo, Health Economics Research Programme

No 2003:12: Smoking and Health Investments: Impacts of Health Adaptation and Damage Reversibility

Jared Carbone , Snorre Kverndokk () and Ole-Jørgen Røgeberg
Additional contact information
Jared Carbone: Economics Department, Postal: University of Colorado
Snorre Kverndokk: Ragnar Frisch Centre for Economic Research, Postal: Gaustadalléen 21, N-0349 Oslo, Norway
Ole-Jørgen Røgeberg: Ragnar Frisch Centre for Economic Research, Postal: Gaustadalléen 21, N-0349 Oslo, Norway

Abstract: In the present paper we examine how different sets of beliefs about the health effects of smoking would influence a rational smoker. By embedding the rational addiction theory in a Grossman model of health investment modified to take account of psychological adaptation effects, we present a model of a rational addict that allows us to explicitly specify beliefs about a direct and indirect effect on both death risk and utility. This allows us to study how a rational addict would smoke with different beliefs of cancer risks, and with or without the well-documented ability to adapt to health changes. Numerical simulation results illustrate a number of different incentives that influence the smoking paths and health investments under the various beliefs, and suggests that beliefs have different impacts at different ages, providing a richer set of dynamics than might initially be expected.

Keywords: Rational addiction; Demand for health; Adaptation; Risk; Life extension

JEL-codes: C61; D91; I12

44 pages, June 21, 2009

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