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Applied Economics Letters

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Rational addiction and the demand for cinema

Samuel Cameron
Published online: 06 Oct 2010.

To cite this article: Samuel Cameron (1999) Rational addiction and the demand for cinema, Applied Economics
Letters, 6:9, 617-620, DOI: 10.1080/135048599352736

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 Applied Economics Letters, 1999, 6, 617–620
Rational addiction and the demand for cinema
SAMUEL CAMERON
Department of Social and Economic Studies, University of Bradford, Richmond
Building, Richmond Road, Bradford, West Yorkshire, BD7 1DP, UK
Received 7 November 1996
This paper estimates Becker’s rational addiction model using a demand for cinema
equation. The results do not seem to be strongly supportive of the rational addiction
model. As in Becker, Murphy, Grossman we find a significant coefficient on the lead
consumption term and a quite plausible discount rate in OLS estimation with significant
price effects. However the IV estimates preferred by Becker et al. fails to give support for
Downloaded by [University of Kiel] at 01:55 28 October 2014
any elements of the model.
I. INTRODUCTION
The rational addiction model of Becker and Murphy (1988)
has been tested on data for cigarette smoking, alcohol drinking
and gambling (see Grossman, 1995) with some success but
also with some problems, notably implausible discount rates.
Thus far the literature has focused on what Becker and
Murphy (1988) term ‘harmful addictions’ which are detri-
mental to health or earnings. In this paper I estimate static and
rational addict models of the demand for cinema using pooled
cross-section time-series data for the United Kingdom. The
results are problematic appearing to offer little support for the
rational addict model.
II. RATIONAL ADDICTION
In Becker et al. (1994) addiction is defined as follows: ‘a good
is addictive if and only if an increase in past consumption
leads to an increase in current consumption’ ceteris paribus
[ibid. p. 398]. The theory of rational addiction was formally
developed in Becker and Murphy (1988) and applied to
cigarette smoking by Chaloupka (1991), Becker, et al. (1994),
Conniffe (1995) and Cameron (1996). The model in Becker et
al. (1994) assumes that smoking has no influence on future
earnings, perfect certainty, discounting of the future at the
market of interest and a stable lifetime utility function
specified as:
U {C (t), C (t - 1), Y (t), e(t )} (1)
where C is consumption of cigarettes, Y is other goods and e is
a stochastic term for unmeasured life cycle influences. Note
1
There is one OLS estimate which is the only result to give plausible results for the discount rate.
Applied Economics Letters ISSN 1350–5851 print/ISSN 1466-429 1 online
that last period consumption enters directly into the utility
function rather than indirectly through a stock of habits
equation which is equivalent to assuming a 100% depreciation
rate on the stock of habits.1 Chaloupka (1991) develops and
estimates the model for depreciation rates between 0 and
100%. Equation 1 is assumed to be quadratic and discounted at
the rate over an infinite life time. Maximizing this subject to
constraints gives a linear difference equation:
C (t) = h 1 C (t - 1) + h 2 C (t + 1) + h 3 P(t) + e(t ) + e(t - 1)
(2)
which is the basis of the estimating equation. The ‘myopic’
model (zero discount rate hence infinite interest rate) which
had hitherto been the preferred treatment of habit formation in
the smoking literature (see e.g. Warner, 1977; Young, 1983;
Stavrinos, 1987; Zanias, 1987; Doroodian and Seldon, 1991) is
nested within this so that a t test of the coefficient on C (t + 1)
should in principle decide between the models. In the rational
addict model plausibility can also be tested by calculating the
discount rate. Becker et al. (1994) find that their model
performs quite badly on this count as all the discount rates
except in the OLS estimation, imply highly implausible
interest rates. Problems with implausible discount interest
rates are also encountered in Chaloupka (1991) and Cameron
(1996). A notable result in Chaloupka (1991) is that estimating
the model for those who currently smoke, on individual data
which is surely the best test of the model, gives a discount rate
of 182.5%. In a study of Irish data, Conniffe (1995) finds the
rational addict model to be rejected on grounds of the
insignificance of the lead consumption term.
Becker et al. admit that some of their results cannot readily
be explained by the rational choice model. What they appear
Ó 1999 Taylor & Francis Ltd 617
 618 S. Cameron

Table 1. OLS estimates of the static demand model. Dependent variable: ATTPCAP. N = 190
Independen t variable Estimated coefficient Standard error t-statistic

INT 2.64000 0.52119 5.06532

DUMN 0.84367 0.25416 3.31951
DUMYH - 6.22161e - 002 0.22046 - 0.28222
DUMEM 0.33298 0.26927 1.23659
DUMWM 0.24345 0.23979 1.01528
DUMLC 0.40064 0.26228 1.52753
DUMSW - 9.65210e - 002 0.20733 - 0.46555
DUMW 0.37726 0.22435 1.68157
DUMEA 1.48711 0.32445 4.58350
DUMNW - 0.95043 0.19112 - 4.97288
COLTREND - 0.18507 1.15980e - 002 - 15.95721
CIN 1.86791e - 002 2.24792e - 003 8.30949
RELP - 4.40911e - 002 0.65712 - 6.70977e - 002
REALINC - 0.31784 6.83888e - 002 - 4.64756
R2 – 0.86458 –
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to have in mind is the discount rate. On p. 407 they note the
‘discount factors correspond to interest rates ranging from
56.3 to 222.6%’ these are dismissed on grounds of
implausibility. In an alternative specification (p. 408) interest
rates of MINUS 81 to 88 are calculated. They claim that their
model is also supported by the work of Chaloupka (1991) on
individual data which is baffling given the result above. Also
when Chaloupka disaggregates his data by age and education
the C (t + 1) coefficient is insignificant for those aged 17–64
and those of low education implying that these groups are
myopic.
III. THE DEMAND FOR CINEMA IN THE UK
A static model of the demand for cinema has previously been
estimated using pooled cross-section time- series data over
1965–83 for the UK by Cameron (1990). This paper uses the
same data so we refer the reader to that paper for further
details of the data. The specification in this paper is changed to
fit in line with the rational addiction literature. Quantity is
measured by attendance per capita (ATTPCAP) with the
regressors being relative price of the cinema (RELP), real
income (REALINC), the number of cinema screens in
operation (CIN), and a trend for the influence of colour
television which = 0 until 1970 and increases by 1 thereafter;
the expected coefficients are, < 0, > 0, > 0 and < 0. Nine
regional dummies are added to take account of quality
differences in the regional cinemas. 2 It is obviou s that there
is no pharmacological component in ‘addiction’ to recrea-
tional time intensive goods such as cinema. However the
Becker and Murphy (1988) development of the rational
addiction model pays no attention to such components in
addiction relying on the much weaker motivation that
consumption in other periods alters marginal utility of
consumption in the current period. As Becker and Murphy
point out consumers can become addicted to almost anything
from jogging to carrying out academic research.
IV. ESTIMATES OF THE MODEL OF CINEMA
DEMANDS
The results of estimating the models are shown in Tables 1–3.3
Table 1 is an OLS estimate of the static demand function
which proves generally satisfactory excepting the insignif-
icance of the price term. Table 2 gives OLS estimates of the
rational addiction model. Judging by the t ratio on the lead
consumption term the myopic model is rejected in favour of
the rational addiction model. The discount rate of 0.88 implied
by values of the lag and lead terms gives an interest rate
(market interest rates are assumed to equal the rate of time
preference) of 13.6% which is in the range Becker et al.
consider plausible. The price and income terms are now
insignificant which contradicts the expectations and findings
of Becker et al. (1994) and of course general consumer theory
and empirical research.
Becker et al. (ibid.) have many different instrumental
variable estimates reported in their paper to take account of
the lag and lead terms in the equation. In Table 3 I use their
preferred IV estimator.4 This proves unsatisfactory as the only
variable approaching statistical significance is the lagged
dependent variable which nears the 5% level on a one-tailed
test.

2
The regional dummies are DUMN, North, DUMYH, Yorkshire and Humberside, DUMNW, North West, DUMEM, East Midlands, DUMWM, West Midlands,
DUMW, Wales, DUMEA, East Anglia, DUMLC, Greater London and DUMSW, South West.
3
Unlike Becker et al. (1994) I am conspicuousl y unable to get a significant t ratio in almost every case.
4
All the regressors in the OLS equation excluding ATTPCAP(- 1) and ATTPCAP(+1) plus RELP(- 1) RELP(- 2) and RELP(+ 1).
 Demand for cinema 619

Table 2. OLS estimates of the rational addict model. Dependent variable: ATTPCAP. N = 170
Independen t variable Estimated coefficient Standard error t-Statistic

INT - 0.21555 0.49483 - 0.43561

DUMN 1.91378e - 002 8.08345e - 002 0.23675
DUMYH 5.99679e - 002 7.03197e - 002 0.85279
DUMEM 5.71134e - 002 8.37959e - 002 0.68158
DUMWM 4.24810e - 002 7.47759e - 002 0.56811
DUMLC 3.87256e - 002 0.21276 0.18202
DUMSW 4.89642e - 002 6.51365e - 002 0.75172
DUMW 3.07669e - 003 8.29335e - 002 3.70983e - 002
DUMEA 9.83232e - 002 0.11100 0.88581
DUMNW 2.09406e - 002 6.58395e - 002 0.31806
COLTREND 3.20506e - 003 8.12200e - 003 0.39462
CIN 3.34789e - 004 8.67790e - 004 0.38579
RELP - 1.56983 1.36710 - 1.14829
REALINC 9.34889e - 002 7.73909e - 002 1.20801
ATTPCAP(- 1) 0.52927 4.08022e - 002 12.97151
ATTPCAP(+ 1) 0.46410 6.30170e - 002 7.36472
R2 0.98541 – –
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Table 3. Instrumental variables estimates of the rational addict model. Dependent variable: ATTPCAP. N = 160
Independen t variable Estimated coefficient Standard error t-Statistic

INT - 0.90349 2.16258 - 0.41778

DUMN 0.20194 0.34576 0.58405
DUMYH 0.28907 0.27643 1.04571
DUMEM 0.24273 0.27966 0.86796
DUMWM 0.15065 0.20847 0.72265
DUMLC 0.40153 1.25759 0.31929
DUMSW 0.20222 0.22621 0.89395
DUMW - 2.09481e - 002 0.34227 - 6.12030e - 002
DUMEA 0.55387 0.68081 0.81354
DUMNW 0.10731 0.23212 0.46229
COLTREND - 1.03735e - 002 5.26111e - 002 - 0.19717
CIN 2.67837e - 003 5.21227e - 003 0.51386
RELP - 8.02470 9.68729 - 0.82837
REALINC 0.51130 0.38069 1.34308
ATTPCAP(- 1) 1.28884 0.79630 1.61853
ATTPCAP(+ 1) - 0.59139 1.25319 - 0.47191

V. SUMMARY AND CONCLUSION
My investigation of the demand for cinema has not proved
strongly supportive of the rational addiction model. As in
Becker et al. (1994) we find a significant coefficient on the
lead consumption term and a quite plausible discount rate in
OLS estimation with significant price effects. However the IV
estimates preferred by Becker et al. fail to give support for any
elements of the model.
REFERENCES
Becker, G.S. and Murphy, K. (1988) A theory of rational addiction,
Journal of Political Economy, 96 (4), 675–700.
Becker, G.S., Grossman, M. and Murphy, K. (1994) An empirical
analysis of cigarette addiction, American Economic Review,
84 (3), 396–418.
Cameron, S. (1990) The demand for cinema in the United Kingdom,
Journal of Cultural Economics, 14 (1) 35–48.
Cameron, S. (1996) Are Greek smokers rational addicts? Applied
Economics Letters, to be published.
Chaloupka, F. (1991) Rational addictive behavior and cigarette
smoking, Journal of Political Economy, 99(4), 722–42.
Connniffe, D. (1995) Models of Irish tobacco consumption,
Economic and Social Review, 26 (4), 331–47.
Doroodian, K. and Seldon, B.J. (1991) Advertising and cigarette
consumption, Eastern Economic Journal, 17 (3), 359–66.
Grossman, M. (1995) The economic approach to addictive behaviour,
in The New Economics of Human Behaviour, (Eds) M. Tomass
and K. Ierulli, Cambridge University Press, Cambridge.
 620
Stavrinos, V.G. (1987) The effects of an anti-smoking campaign on
cigarette consumption: empirical evidence from Greece, Applied
Economics, 19 (3), 323–29.
Warner, K. (1977) The effects of the anti-smoking campaign on
cigar-ette consumption, American Journal of Public Health, 67,
645–50.
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S. Cameron
Waters, T.M. and Sloan, F.A. (1995) Why do people drink: tests of
the rational addiction model, Applied Economics, 27 (8), 727–36.
Young, T. (1983) The demand for cigarettes: alternative specifica-
tions of Fujii’s model, Applied Economics, 15, 203–711.
Zanias, G.P. (1987) The demand for cigarettes: habit formation and
health scare, Greek Economic Review, 7(2), 248–62.