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    1. Distinguished Professor of Economics, City University of New York Graduate School and Research Associate, National Bureau of Economic Research Phone 1–212-953-0200 times104, Fax 1–212-953-0339 E-mail
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    1. Associate Professor of Economics, University of Illinois at Chicago and Research Associate, National Bureau of Economic Research, Phone 1–312-413-2367 Fax 1–312-996-3344, E-mail
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    1. Director, Health Economics, Greater New York Hospital Association, Phone 1–212-506-5414 Fax 1–212-397-0717, E-mail
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    • *This is a condensed version of Grossman, Chaloupka, and Sirtalan [1996]. The longer version, which is available on request, contains a detailed discussion of the model, data, and empirical results. It also considers a number of estimation issues and performs a variety of sensitivity analyses. In particular, we show that the choice between weighted regressions (to correct for oversampling of illegal drug users at baseline) and unweighted regressions is moot because the two sets of estimates are very similar. We also present results with alternative values for the open-ended alcohol drinking frequency category of 40 or more occasions in the past year of 45, 55, 60, 65, 70, 80, 90, 100, 200, and 300 (a value of 50 is used in the paper). The slope coefficient of the price of beer rises in absolute value as the value assigned to the open-ended category rises, but tests of significance and long- and short-run price elasticities are not affected. In addition, results with alternative assumptions about the number of drinks of alcohol that it takes to get pretty high are shown to be very similar to those in the paper. Finally, estimates obtained from a two-stage least squares fixed-effects model in which all time-varying variables are transformed into deviations from person-specific means and time-invariant variables are deleted confirm the estimates presented in the paper. Research for this paper was supported by grant 5 R01 AA08359 from the National Institute on Alcohol Abuse and Alcoholism to the National Bureau of Economic Research. We are extremely grateful to Patrick M. O'Malley, Senior Research Scientist at the University of Michigan's Institute for Social Research, for providing us with the Monitoring the Future panels and for agreeing to attach county identifiers to our tapes. We also are extremely grateful to Jerome J. Hiniker, Senior Research Associate at ISR, for creating the computer programs that produced these tapes. Part of the paper was written while Grossman was a visiting scholar at the Catholic University of Louvain in Belgium, and he wishes to acknowledge the financial support provided by that institution. We are indebted to Gary S. Becker, Randall K, Filer, Robert J. Kaestner, Theodore E. Keeler, Donald S. Kenkel, Lee A. Lillard, John Mullahy, Kevin M. Murphy, William S. Neilson, Jon P. Nelson, Thomas R. Saving, Frank C. Wykoff, Gary A. Zarkin, and two anonymous referees for helpful comments and suggestions. Preliminary versions of the paper were presented at the 1995 meeting of the American Economic Association and the 1994 meeting of the Western Economic Association and at seminars at Brigham Young University, the Catholic University of Louvain, Charles University in Prague, the University of Chicago, Erasmus University in Rotterdam, the Rand Corporation, the Stockholm School of Economics, and the United States Military Academy at West Point. We are indebted to the participants in those meetings and seminars for comments and suggestions. Finally, we wish to thank Patricia Kocagil, Hadassah Luwish, Geoffrey Joyce, Sandy Grossman, Esel Yazici, and Sara Markowitz for research assistance. This paper has not undergone the review accorded official NBER publications; in particular, it has not been submitted for approval by the Board of Directors.


In a panel of young adults, we find that alcohol consumption is addictive in the sense that increases in past or future consumption cause current consumption to rise. The positive and significant future consumption effect is consistent with the hypothesis of rational addiction. The long-run price elasticity is approximately 60% larger than the short-run price elasticity and twice as large as the elasticity that ignores addiction. Thus, a tax hike policy to curtail consumption or abuse may not have a favorable cost-benefit ratio unless it is based on the long-run price elasticity. (JEL 110)