Economic Perspectives on Addiction: Hyperbolic Discounting and Internalities

Abstract

This paper provides an introduction, with critical interpretations, to the useof hyperbolic discounting as a model of behavior for the consumption of addictive goods.The exponential and hyperbolic discounting models are carefully reviewed, withparticular emphasis on the implications for time consistency. We then present a simpleexplanation of the logic of market failure resulting from internalities and the economicinefficiency that can result when time inconsistent choices have intertemporal impacts.We then briefly review, with commentary, key work from the experimental and broaderempirical literature that can be used to assess and critique the hyperbolic discountingmodel. (I12)