Cawley%20Addictive%20Behaviors%20Respond%20to%20Incentives

Cawley%20Addictive%20Behaviors%20Respond%20to%20Incentives...

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Reefer Madness , Frank the Tank or Pretty Woman : To What Extent do Addictive Behaviors Respond to Incentives? John Cawley 1 Department of Policy Analysis and Management Cornell University August 11, 2006 Paper prepared for the conference, “Incentives and Choices in Health Care: Contributions and Limitations of Economics.” At Oberlin College, September 8-10, 2006 1 I thank my coauthors on past research on health behaviors, who have informed my thinking on these topics: Richard Burkhauser, Sheldon Danziger, Don Kenkel, Sara Markowitz, Chad Meyerhoefer, John Moran, David Newhouse, Kosali Simon, John Tauras, and Jay Variyam.
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2 Introduction Unhealthy behaviors such as drinking alcohol, smoking, taking drugs, engaging in risky sex, and eating and physical activity patterns that lead to obesity are of considerable policy concern for a variety of reasons. First, they have been linked to external costs imposed on taxpayers through private group health insurance and public health insurance programs (Manning et al., 1991). Second, some (non-economists) make the normative argument that these behaviors are morally wrong, and the government should intervene to tax or otherwise regulate these activities (Kersh and Morone, 2002). Both of these arguments lead proponents to recommend taxes on the unhealthy goods; Pigovian taxes that internalize externalities in the first case, and sin taxes to reduce consumption in the second case. This raises the broader question of whether health behaviors respond to incentives, whether a tax or in some other form. This paper synthesizes the economic research that indicates the extent to which health behaviors respond to incentives. In particular, it answers the following research questions: 1. Do abstainers respond to incentives when deciding to start consuming? In other words, do unhealthy behaviors respond to incentives at the extensive margin? 2. Do participants respond to incentives when deciding how much to consume? In other words, do unhealthy behaviors respond to incentives at the intensive margin? 3. How can this information be used to better set health policy? This paper focuses on habitual or addictive goods and activities. In economics, a good or activity is considered addictive if it has three characteristics. The first is
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3 tolerance - the amount of past consumption directly affects utility. For example, someone who has consumed a lot of drugs in the past is unhappier (all else equal) than someone who has abstained. Drugs are an example of a harmful addiction, but beneficial addictions are also possible. For example, exercise can be habitual, and the amount of past exercise that one has engaged in can raise one’s utility. The second characteristic is withdrawal – consuming the good raises the person’s instantaneous utility. In other words, the good has a positive marginal utility of consumption. The third characteristic is reinforcement - the good has a higher marginal utility of consumption when the person
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This note was uploaded on 05/30/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell.

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Cawley%20Addictive%20Behaviors%20Respond%20to%20Incentives...

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