Journal of Health Economics 18 1999.

393407

1
Addiction and discounting
)
A.L. Bretteville-Jensen
National Institute for Alcohol and Drug Research, Danneigsseien 10, 0463 Oslo, Norway

Received 13 July 1998; received in revised form 23 November 1998; accepted 23 November 1998

Abstract

In 1988, Becker and Murphy wBecker, G.S., Murphy, K.M., 1988. A theory of rational
addiction. Journal of Political Economy, 96, 675700.x launched a theory in which they
proposed that the perspective of rational decision-making could be applied also to cases of
addictive behaviour. This paper discusses the theorys assumptions of interpersonal varia-
tion and stability in time preferences on the basis of estimates derived from three groups of
people with different consumption levels of illegal intoxicants. We find that active injectors
of heroin and amphetamine have a higher discount rate than a group reporting that they
have never used the substances. Of greater interest, though not in accordance with Becker
and Murphys assumption of stability, we also find that the discount rate among active and
former users differs significantly. These findings raise the question of whether a high
time-preference rate leads to addiction or whether the onset of an addiction itself alters
peoples inter-temporal equilibrium. q 1999 Elsevier Science B.V. All rights reserved.

JEL classification: D91

Keywords: Rationality; Addiction; Time preferences

)
Tel.: q47-22-040875; Fax: q47-22-719059; E-mail: alb@sifa.no
1
A preliminary version of this paper was presented at the 18th Nordic Health Economists Study
Group Meeting, Finland, August 2223 1997.

0167-6296r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved.
PII: S 0 1 6 7 - 6 2 9 6 9 8 . 0 0 0 5 7 - 5
394 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407

1. Introduction

It has been claimed that peoples demand for addictive goods, e.g., intoxicants,
is not in line with rational behaviour. Rational economic behaviour implies, among
other things, that a person acts in keeping with his own preferences and in relation
to what he considers best for himself, and that he follows a consistent plan for the
maximisation of utility over time. The consumption of intoxicants such as heroin
does not seem to meet these criteria. Hence, traditionally, in modelling a demand
for addictive goods, economists have assumed that imperfectly rational behaviour
is incorporated either in the form of endogenous preferences or as stable, but
inconsistent, short-run and long-run preferences cf. Grossman, 1993 for a review..
In opposition to this tradition, Stigler and Becker 1977. and Becker and
Murphy 1988. state that the demand for addictive goods can very well be
analysed by means of the same demand theory as for any other commodity.
Becker and Murphy demonstrate how a rational consumer may start consuming an
addictive good and end up in a situation in which the consumption level of the
addictive good is very high and sub-optimal for the actor himself. The high
consumption level is a consequence of a series of previous choices, not the result
of an addiction illness, lack of information, or irrational behaviour. However,
without changes in external factors the economic actor is not able to change this
consumption pattern as this will mean a temporary set-back in utility.
Becker and Murphy claim that people with high preferences for the present are
more likely to end up with such sub-optimal consumption levels. Peoples time
preferences and discounting of future utility are thus essential to their theory.
Strong addiction requires a large effect of previous consumption of the good on
present consumption, and a high time-preference rate TPR. is supposed to
contribute to this. The full cost of current consumption includes possible negative
consequences occurring at later points in time, but, with heavy discounting, these
negative consequences are given less weight. The authors make three assumptions
about consumers time preferences: 1. time preferences are stable, 2. there is
great interpersonal variation in the size of the TPR, and 3. people with a high
TPR are more likely to become addicted, that is, high TPR is assumed to be a
contributory cause to addiction. At the outset this seems reasonable, but do these
theoretical assumptions hold when confronted with actual behaviour?
The pure TPR s . is here conventionally defined as the marginal rate of
substitution between present and future utility and the corresponding discount
factor is 1r1 q s .. A discount function gives the present value of utility obtained
at some later point of time. The higher the value of the TPR and the lower the
discount factor. the higher the preferences for the present.
Some of the theorys predicted consequences of changed economic factors have
been empirically tested cf. Becker et al., 1991 wcigarettesx; Keeler et al., 1993
wcigarettesx; Grossman et al., 1998 walcoholx.. The theorys presuppositions about
systematic differences in peoples discount rates have, however, not been the
 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407 395

object of corresponding empirical interest. This paper will discuss the role of time
preferences in Becker and Murphys theory and examine the assumption about
variations in peoples discount rate according to their consumption of an addictive
substance. A special data set has been collected for this purpose. Is it so that
people who are addicted, for example, to heroin have a higher discount rate than
those who have never been addicted to the substance? Are there differences in the
discount rates between those who are addicted to a narcotic substance and those
who have succeeded in giving up their misuse? Do people who have managed to
stop being misusers still have a higher discount rate than a so-called normal
population which has not been addicted to the substance? These questions will be
discussed on the basis of empirically estimated discount rates.
The essential concern and main topic for discussion in this paper is: Does a
high TPR contribute to addiction or will the onset of an addiction by itself alter
peoples inter-temporal balancing? The question has theoretical and empirical
implications. Discounting has a long history as a topic of interest in general
economic theory cf. Loewenstein, 1992 for an overview.. Moreover, there is still
a need for a better understanding of the complicated phenomenon of addiction.
Prevailing theories influence the authorities choice of prevention and treatment
strategies, and Becker and Murphys theory, which emphasises peoples discount-
ing, has been met with interest.
The estimation of how people balance utility between different periods is,
however, difficult and no single method has been agreed upon as yet. Analyses of
both revealed and stated time preferences are commonly based on peoples
consumption Deaton, 1992. and may at best be taken as indicators of the true
TPR. The method of hypothetical questions is employed here. To examine whether
there are systematic differences data were collected from three groups of people:
1. active injecting addicts; 2. a normal population with corresponding charac-
teristics with respect to sex, age, and education as the active misuser group; and
3. former misusers of heroin and amphetamine. By including the latter group it
was assumed that an indication could be acquired of the stability in preferences
within a group of people who have all been seriously addicted.
The paper is organized as follows. Becker and Murphys theory is outlined in
Section 2. Section 3 gives a description of the data set and the results of the
empirical estimations are presented. Finally, on the basis of these results, the
assumption of stable time preferences is discussed and criticized in Section 4.

2. Theories of addiction and discounting

Becker and Murphy 1988. have launched a theory in which it is assumed that
actors basically calculate the utility and disadvantages of consuming addictive
goods for all future periods. It is assumed that people maximise the total
396 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407

discounted value of utility over the life span subject to a budget constraint. If T
equals the length of life and s a constant rate of time preference the utility
function would be
T ys t
U t . s H0 e u y t . ,c t . ,S t . d t 1.

where U t . is the discounted life-time utility; uP. is the period specific utility;
y t . is the consumption of non-addictive goods; c t . the consumption of addictive
goods; and S t . is the stock of what the authors call consumption capital.
Consumption capital is a function of previous consumption of addictive goods and
life events and it is depreciated at a rate d . Negative addiction is characterised by
the fact that the consumption capital reduces future utility and earning potential.
The life time utility function is separable over time in y, c, and S, though, it is not
separable in y and c alone since their marginal utilities depend on S.
For a rational consumer to end up with a high consumption level defined as
addiction, the authors assume certain characteristics of addictive behaviour and of
the individual. The two central features of addictive behaviour are defined in terms
of the capital stock.
Tolerance, u S - 0, i.e., the utility of any level of consumption today becomes
lower the more the individual has consumed of the commodity earlier.
Reinforcement, which means that, ceteris paribus, greater previous consumption
increases the present consumption as the marginal utility of consumption today
increases the more the individual has previously consumed u cS ) 0..
As for the individual characteristics, the theory claims that addiction is more
likely for people with high preferences for the present high s . and for those
whose stock of consumption capital depreciates more rapidly high d .. With a
high TPR, people will pay less attention to adverse future consequences of present
consumption of addictive goods and a high depreciation rate means that the extent
of these adverse consequences will be smaller. Thus, the theory emphasises that
addiction involves interaction between people and goods.
According to Becker and Murphys theory, people determine their optimal
consumption of goods on the basis of their utility function; current as well as
expected prices and income; initial stock of consumption capital; depreciation rate
of consumption capital; and their TPR. The optimal consumption path will have
both stable and unstable points of equilibrium. The authors emphasise that
multiple points of equilibrium on this consumption curve are central to the theory
because they mean that the same person may have different levels of consumption
of the addictive commodity at different times, even though the economic factors
confronting the person are the same. Anticipated increases in future prices of
addictive goods lower current consumption because consumption at different times
are complements. This implies that addicts respond more to permanent than to
temporary changes in prices of addictive goods. According to the theory of
rational addiction, cold turkey is used to end strong addictions and addicts often
 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407 397

go on binges. Becker and Murphy also assume anxiety and tension to precipitate
an addiction as this will increase the stock of consumption capital S ..
The TPR contributes to determining where the optimal consumption curve will
be situated for the individual person and what the shape of the graph degree of
curvature. will be. The TPRs are thus central to the development of addiction, and
the theory of rational addiction assumes that time-preferences are stable and that
there are great individual variations in the size of the TPR.
The importance of peoples discounting as a contributory factor in explaining
addiction has also been emphasised by others. The Ainslie 1992. theory of
inter-temporal choices departs from traditional theory both in the form of the
discount function and by virtue of the fact that the discount factor is not presumed
constant. Ainslie claims that both human beings and animals discount future utility
by a hyperbolic discount function. His theory opens for preference reversing and
he explains addiction as behaviour developed over time in which preferences are
changed when a commodity temptation. comes close in time. A drug misuser may
have preferences for a life without intoxicants, but when he is faced with an offer
of an immediate experience of intoxication, the latter alternative wins. According
to Ainslie, people are not born rational in the sense of dynamically consistent
utility maximisation, but they strive to overcome their weakness to give in for
immediate temptations that go against their long-term goals.
Skog 1997. explains human beings path to addiction, their behaviour during
active misuse, and the way out of misuse, by assuming that human beings do not
apply constant but varying discounting. Actors use an anticipated value a
geometrical average. of the discount rate as a basis for inter-temporal evaluations,
and temporal deviations on both sides of the anticipated value will be normal
compared to their normal, average, behaviour, people may, for short time
intervals, behave more patiently or more impatiently than usual.. Skog argues that
a variable discount factor is not contrary to the criterion of rationality, and, by
introducing it, he can both explain the fact that rational individuals become
addicted and also provide a rationale for the phenomenon of relapse among former
addicts. People who have large variations in their discount factor will have a lower
anticipated mean discounting value and thus a greater probability of becoming
addicted.
Since Becker and Murphys theory to a great extent has influenced the field of
addiction in the past decade, we will discuss the validity of its assumptions on the
basis of the discount rate estimates obtained from three groups of people with
different consumption levels of illegal intoxicants. According to the theory, one
would expect a significant differences in the estimated value of the discount rates
between active misusers and non-misusers. The estimated value between active
and former misusers should, however, not show great variance. But, a possible
self-selection to the group of former users may exist if those with a relatively low
TPR more easily manage to rid themselves of their addictive habit. If this is the
case, differences in the mean value of estimated TPR between active and former
398 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407

users may occur. The empirical results are presented in Section 3, but first a
description of the data set and some general comments on discounting and
empirical estimation of time preferences.

3. Does the estimated discount rate vary in accordance with Becker and
Murphys assumptions of individuals, TPR?

3.1. Data

The data set collected for these analyses consists of information given by a
group of active injecting addicts, a group which stated that they had never been
misusers, and a group which had previously misused illegal intoxicants. They were
all interviewed in order to determine their discount rate.
The group of active misusers were interviewed in the immediate vicinity of the
Needle-Exchange Bus in Oslo. The Bus hands out free-of-charge hypodermic
syringes and condoms as a preventive measure against HIV, and is centrally
placed in areas of the capital where a lot of drugs are sold. The Bus is the only one
of its kind in Norway. In 1996, the Bus was visited on about 85,000 separate
occasions and it handed out more than 1.1 million hypodermics Annual Report
for the AIDS Information Bus, Department for Preventive Medicine, 1996.. The
number of active injecting users in the Oslo area was in 1990 estimated to be
23000 people Skog, 1990., but the injecting population has most probably
increased since then. The people interviewed were asked to participate after they
had availed themselves of the services provided by the Bus, and they were defined
as active misusers if they stated that they had injected themselves with heroin or
amphetamine during the last month. Due to the illegal nature of drug-taking, the
representativeness of the sample can not be fully guaranteed. However, we will
argue that the selection methods applied here are second bests and, thus, that the
estimated differences are probably not a result of sample bias.
As many people as possible were interviewed at each interview session, but
questioning absolutely everyone was not feasible. A small minority were too
intoxicated and therefore not approached. In addition, some of those who were
approached did not want to participate, but no refusal rate has been estimated. On
one occasion, of the 150 users who used the service that evening, about 50 were
interviewed. People with an extensive injection habit will be likely to use the
service more often than infrequent users, of course, but such users may also have
been more likely to refuse to co-operate so any over-representation of this group
may not be a problem. Age and sex characteristics of the sample fit well with
other studies that have been carried out on this population. Except for the income
variable, non-item response was not a problem. Questions for this study were
contained in a questionnaire which, since 1993, has been used in a quarterly
collection of information on consumption, financing, and drug prices among users
 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407 399

of the Bus. A more detailed description of the population, representativeness,

sampling, etc., can be found in Bretteville-Jensen and Sutton 1996..
For the 110 active misusers who responded to the questionnaire, we wanted a
group of non-misusers with corresponding characteristics with respect to sex, age,
and education as a case control. In accordance with discounting theory, we
assumed that it was age and education in particular that we should control for. A
group of non-misusers was found which matched the gender, age, and education
specifications of the group of addicts. The non-misusers were approached in the
street, in shopping centres, etc., and they were randomly selected from the
passers-by. In addition to questions for the discount rate the respondents were
asked about their consumption of intoxicants over the last year.
The group that was least easily available was the group of former misusers. In
the main we went in for the snowball method whereby, via knowledge of a few
former misusers as a starting point, we were able to make contact with others. A
person was defined as a former misuser if hershe stated that he had previously
been a long-term misuser of either heroin or amphetamine. In contrast to the
face-to-face interviews for the groups above, the interviews for this group were
mainly conducted by telephone. We also visited an activity home for former
misusers for the purpose of interviewing. The questionnaire used here was the
same as for the group of non-misusers, and, in all, 50 former misusers were
interviewed.

3.2. Method

All three groups were asked identically worded questions to ascertain the
weighing of income over time. The questions appeared to be properly understood
by everybody and non-item responses were not a problem. The respondents were
asked to imagine that they were participants in a lottery in which they won a
specified amount of money. Two of the questions asked the interviewees to give
an estimate of how much they would be willing to sell the winning ticket for now,
if the prize money was not to be paid out until, respectively, 1 week and 1 year
ahead. In other words, we aimed to pin down the amounts that would give the
respondents equal utility if they obtained the money now, compared to the utility
the lottery prize would give them at some later point in time.
The calculation of the discount rates was carried out by means of the formula:
xi
1y
y
ri s xi i s 1,2 2.
y

where r 1 represents the annual discount rate; r 2 is the weekly discount rate; x 1 is
the amount the respondents state they would sell the winning ticket for if the
400 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407

winnings were to be paid out in 1 years time; x 2 is the corresponding selling

price if the prize were to be paid out in 1 weeks time; and y is the amount won.
Discount rates were estimated for all respondents and the mean value for each of
the three groups is presented in Table 1 in Section 3.3.
Becker and Murphys theory considers the pure time preferences and the
estimates obtained here are assumed to be indicators of this, but the empirical rates
will additionally be affected by other factors, such as the individuals income and
wealth, their life expectancy, and the extent of uncertainty and risk involved:
ri j s f j sj ,p j . 3.
where ri j is the estimated discount rate for person j; sj is the pure TPR
representing individual js balancing of utility in different periods; and p j is a
rate vector of all the other factors.
Variations in estimated discount rates will be caused by individual differences
in either sj or p j . If however, p j has a low inter-group variation, any difference
found in the mean value for the three groups could be assumed to stem from
differences in the true TPR. To what extent does p j differ between the groups?
Risk or uncertainty were not involved in the decision the respondents were asked
to make as they were guaranteed to receive the prize they hypothetically had won.
However, we were unable to control for differences in wealth and income between
the respondents as we had income data only for the group of active users. The
income data from active users confirmed that there was a broad array of legal and
illegal income sources, with dealing being the single most important income
source reported by males and prostitution by females. The Norwegian welfare
system guarantees a relatively generous minimum level of income for entitled
citizens and 89% reported that they received some form of social benefit. Illegal
income contributed nevertheless by far the most and the monthly median income
among the drug users was estimated to be 38,250 NKr US$5170., an amount
which could cover a daily heroin consumption of 0.5 gram. As no information on
individual income levels was obtained for the other two groups, we used the
statistical mean income for comparison. For people with the same educational
level and corresponding age group as the non-users, Statistics Norway gave an
average income in 1995 of 195,000 NKr 16,250 s US$2200 per month.. Thus,
active drug users probably handle larger cash flows than non-users. Wealth, on the
other hand, is more likely to be distributed among the latter group and may
outweigh the effect of income.
Differences in credit market restrictions faced by the individuals may also exert
some influence on the estimated discount rate. In the formal economy restrictions
are closely related to ones registered income and wealth. Most drug users are
therefore either excluded from the ordinary credit market or they have to pay very
high interest rates. Analyses of data obtained from intravenous drug users show
that there is an informal short-term credit market operating where drug
usersrdealers buy drugs on credit. Interest rates on such loans are not common
 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407 401

and informal contacts and friendship decide whether a loan is given. If estimated
discount rates partly reflect peoples possibilities of raising extra money if needed,
the difference between drug users and others may not be as large as restrictions in
the formal economy could indicate. Illegal income sources and credit opportunities
in the informal economy contribute to this.
The effect of differences in income, wealth and credit restrictions on the
estimates of the discount rate is difficult to evaluate. One could argue that the
reported differences in Table 1 may partly be influenced by differences in p j , but
that these differences can not fully explain the observed variations in discount
rates. Furthermore, experiments have shown that the elicited minimum selling
price obtained by similar methods as are applied here, are sensitive to upper limits
of buy-out prices Bohm et al., 1997.. However, as the same limits were given to
the three groups of respondents, the upper limit may simply affect the leel of
elicited selling prices and, thus, comparisons between the groups will still be
meaningful.
Also, a second method was applied to elicit the participants time preferences.
In order to take account of the special, often acutely felt, financial circumstances
in which drugs misusers may find themselves, the respondents were asked to
choose between two ways of having the winnings paid out. Both methods of
payment provided a daily sum large enough to cover the purchase of a single dose
of heroin or amphetamine 200 NKr.. The choice was between two ways of
payment, in which the first would provide NKr 400 daily for the first half-year and
NKr 200 daily for the second half-year, while the other method offered NKr 200
the first half-year and NKr 600 the second half-year. For the addicts, the decision
could be seen as a choice between two free daily doses of narcotics the first half
year and one free dose the next vs. one dose the first half year followed by three
daily doses for the rest of the year. By choosing the first method of payment, in
which the larger sum came in the first half-year, one would end up with a lower
total sum when the payment year was over NKr 110,000 as against NKr
145,000.. Impatience would therefore mean a loss in the total amount won. For
each group the percentages choosing the two possible payment plans were
calculated and the results can be seen in Table 2. The questions relating to the
measurements of time preferences are quoted in Appendix A.

3.3. Results

The average of estimated annual discount rates in Table 1 is significantly

different for the three groups KruskalWallis test: x 2 24,942; df 2; p - 0.001..
Comparisons between the groups show that former misusers vs. non-misusers and
active misusers vs. former misusers both differ at a p - 0.001 level. The differ-
ences in means were tested by applying a MannWhitney test Siegel and
Castellan, 1988, p. 128. as the estimated time preference rates were not normally
distributed.
402 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407

Table 1
Average of estimated annual and weekly discount rate and corresponding discount factor for the groups
of active misusers, non-misusers, and former misusers of hard narcotic substances
Annual Annual Weekly Weekly Size of
discount rate discount factor discount rate discount factor sample
r1 . w1r1q r1 .x r2 . w1r1q r 2 .x
Active 0.90 1.77. 0.53 0.05 0.13. 0.95 ns110
Non-misusers 0.05 0.13. 0.95 0.0002 0.0013. 0.999 ns110
Ex-misusers 0.15 0.24. 0.87 0.002 0.010. 0.998 ns 50

Standard deviation in parentheses.

Non-misusers in Table 1 quote an annual rate roughly corresponding to the

level of interest applying to large capital deposits in the market. The corresponding
rate for former misusers lies somewhat higher, but in the vicinity of the level for
non-misusers.
The weekly discount rate was somewhat problematic to estimate. The question
asking how much the respondents would be willing to sell the winning ticket for
now if the winnings were to be paid out in a weeks time, revealed that 80% of the
active misusers would not have sold the ticket for less than the prize money, while
the corresponding values for non-misusers and former misusers were, respectively,
98 and 96%. The ranking of the estimated weekly discount rates remained the
same as for the annual discount rates.
The relative correlations between the estimated discount rates for active mis-
users and non-misusers can be said to conform with Becker and Murphys theory.
Table 1 shows that the active misusers state that they have a significantly higher
discount rate. The high discount rate and correspondingly low discount factor
0.53. is consistent with what Becker et al. 1991. report in a study based on a
data set of annual per capita cigarette sales by the State for the period 19551985.
By applying a rational addiction framework the authors obtain estimates of the
discount factor ranging from 0.31 to 0.64 for different empirical models. However,
Becker et al. find their point estimates implausibly low and suggest the unrealistic
assumption of perfect foresight as an explanation for their finding.
Support for a positive relationship between temporal discounting and substance
abuse is however also found by Vuchinich and Simpson 1998. who compare the
discounted value of delayed amounts of money among heavy social and problem
drinkers with light drinkers and by Madden et al. 1997. who compared the
delayed monetary discounting of opioid-dependent with control participants.
The great differences between the rates of active and former misusers on the
other hand, do not seem to accord with the assumption of Becker and Murphy
1988. of stable preferences. If high discounting is a contributory cause of drug
misuse, one would expect former misusers also to have a high value on their
discount rate. According to the theory, consumption capital will be reduced when
 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407 403

Table 2
Percentages opting for the two possible methods of payment of winnings
Those choosing A %. Size of sample
Active 32% w23.3, 40.7x ns110
Non-users 8% w2.9, 13.1x ns110
Former users 8% w0.5, 15.5x ns 50

Confidence intervals in brackets.

consumption of addictive goods ceases, but the actual discounting ought to remain
unchanged.
The percentages choosing to have their money paid out under method A a
larger daily sum for the first half-year, but a lower total amount. and method B a
larger daily sum for the second half-year and a larger total sum. are shown in
Table 2.
Here, too, a multiple comparison indicates that the groups differ KruskalWal-
lis test: x 2 73,763; df 2; p - 0.001., and we find that active misusers are more
impatient than the groups with whom the misusers are compared. The difference
between active vs. non-users and ex-users is significant at a p - 0.001 level
applying a MannWhitney test. As many as 32% of active users state that they
would have chosen method A as the payment of their winnings, while the
corresponding proportions for non-misusers and former misusers in both cases is
8%.
The two types of question formulations used in this study can only provide
indicators of the true time preference. To what extent the question formulation
applied for Table 1 is appropriate for revealing utility evaluations over time may,
of course, be open to discussion. The question providing the basis for Table 2
may, perhaps, somewhat better cover what we want to measure here, as an attempt
has been made to take into consideration the acutely felt need for money many
drugs misusers experience as a result of the displeasure of abstinence. The
interesting thing is that both types of question formulations provide estimates that
point in the same direction, namely that active misusers discounting differs
significantly from the discounting that is quoted by the groups of non-misusers
and former misusers.

4. Discussion

Becker and Murphy 1988. do not consider irrationality or endogenous prefer-

ences in explaining addictive behaviour. Among other things, they assume rational
consumers with stable time preferences and emphasise individual differences in
discounting as one explanatory cause for addiction. When examining these as-
sumptions empirically we find significant variations in the estimated discount rate
404 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407

between the groups in the data set. However, only the difference between active
and non-misusers seems to be in accordance with the theory, something which
raises the question of whether the assumption of stable preferences set forth by
Becker and Murphy actually holds. Let us therefore take a look at possible
explanations for the difference in estimated discount rates between active and
former users and for the difference between former and non-users.

4.1. Actie s. former users

Two possible explanations may be given for the results reported in Tables 1 and
2:
1. The estimated discount rate may be lower in the group of former users if
there is a selection mechanism at work. Given that active misusers as a group have
a relatively high level of discounting, there will probably be large individual
differences within the group. If it is not a matter of chance who manages to give
up the misuse, it appears probable that individuals with a relatively low discount-
ing level will more easily escape from an addiction.
2. Alternatively, active misusers may have a relatively high discount rate
because addiction to intoxicants by itself has changed their discounting. Addiction
could influence peoples balancing of future and present income through a.
changes in their pure time preference s ., or b. through changes in other
factors p . influencing inter-temporal balancing discussed in relation to Eq. 3..
a. High discounting may be a consequence of addiction if the physical
dependence influences the inter-temporal balancing. Craving and abstinence pains
may, perhaps, make people less able and willing to think in scenarios and stick to
chosen strategies. The present may be given more weight. Misuse of substances
such as LSD may, in addition, change the consumers perception of reality and
ability to think rationally and thus change the individuals pure time preferences.
b. In Section 3, various reasons why people discount were discussed, and risk
and attitudes to risk and uncertainty were put forth as factors. The lives led by
misusers of hard narcotic substances involve a heightened morbidity risk, some-
thing which, according to discounting theory, will make actors less willing to
postpone consumption to later periods. Misusers are also uncertain as to whether
they will be in a position to experience tomorrows consumption on account of the
risk of overdosing, imprisonment, etc. With a lower life expectancy they will have
fewer years over which to discount, something that in itself will reduce the
empirical discount factor.
In addition to a. and b., a third factor may also influence addicted peoples
way of discounting. Becker and Murphy mention reinforcement as a characteris-
tic of addictive behaviour. The more the marginal utility of the addictive good
increases over time, the more addicted the person concerned. When the marginal
utility of addictive goods increases the individual will switch his consumption
from non-addictive goods to addictive ones so that the utility from different goods
 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407 405

equalizes on the margin. Changes in marginal utility may, however, also change
the balancing of utility between different time periods.
If drug misuse itself influences discounting, this may contribute to explaining
why the rates were so different for active and former misusers since this influence,
wholly or partly, will cease when the misuse ends.
4.2. Former s. non-misusers
As seen in Table 1, former users also report a somewhat higher discount rate
than non-misusers. This may simply reflect that those with a lower preference
level for the future were those who became drug misusers in the first place.
However, the difference in the rate value may also turn out to be a consequence of
addiction if the influence on time preferences mentioned above does not totally
disappear after the cessation of drug use. A small, but lasting, increase in the risk
of diseases and early death may, for instance, have occurred during the period of
misuse. In addition, economic prospects may be less promising for former users
than for the group of people who have never been addicted to narcotic substances.
Becker and Murphy 1988. presented three assumptions about time preferences:
they have inter-personal variation; high time preferences are one contributory
cause of addiction; and time preferences are stable. Given that the estimated
discount rates in this study can be taken as rough indicators of the time preference
rate, the results confirm that the TPRs to a large extent vary between people with
different experience of addiction to a narcotic substance. Active users had a
significantly higher discount rate than non-users which is in line with the
hypothesis of high TPR as a contributory cause. Ex-users significantly lower
discount rate could be caused by a selection mechanism, but it could also be that
the assumption of stable time preferences does not hold. The theory of rational
addiction does not consider the possibility that addictive behaviour itself may
change an individuals time preference. A high TPR may be one among several
causes of addiction, but great impatience and short-sightedness will probably also
arise as a result of addiction. Endogenous time preferences in the case of addiction
will contribute to undermining Becker and Murphys theory. The nature of the
data and methods applied in this study, however, can not give evidence for either a
rejection or a confirmation of the assumption of stability in preferences, but the
analysis indicates that there may be reasons to question it.
That greater impatience can arise as a result of addiction is mentioned in a more
recent paper by Becker and Mulligan 1997.. Their point of departure however, is
that endowed time preferences are excessively high and that rational people will,
to a varying degree, have incentives to invest in future-oriented-capital in order
to reduce the size of their TPR. Addicted people will have fewer incentives than
others, ceteris paribus, because increased consumption of harmful substances tends
to raise present utilities at the expense of lowering future utility, and increased
future utility is one of the factors that is assumed to lower the target equilibrium
406 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407

level of the TPR. Thus, according to the article, addicted people may become even
more addicted as their TPR increases. Opening for an endogenous determination
of the TPR is a very different starting point than the one that was taken in the
theory of rational addiction. In the work of Becker and Murphy 1988., it was
emphasised that even addictive behaviour could be analysed within a frame of
classical economic theory based on stable time. preferences. An approach in
which the assumption of stable preferences is less binding may, however, be more
fruitful in discussing the relationship between addiction and discounting.
As mentioned above, both the theories of Ainslie 1992. and Skog 1997. for
discounting are based on non-stable time preferences. Skog opens for the possibil-
ity that the onset of an addiction itself may influence peoples inter-temporal
balancing, while Ainslie does not. The empirical results reported here suggest that
the probable two-way relationship between addiction and discounting should be
further investigated.

Acknowledgements

Elizabeth Nygaard,
The author would like to thank Erik Birn, Hilde Luras,
Thor Olav Thoresen, Aina Uhde and two anonymous referees for helpful com-
ments.

Appendix A. Questions posed to the interviewees for the estimation of the

discount rate

044 Imagine that you bought a lottery ticket and were told that you had won
NKr 100,000, but the prize money could not be paid out to you until 1 year from
now. If somebody came and wanted to buy the winning ticket from you now, so
that you could have the money immediately, how much would you be willing to
sell the winning ticket for so that you could have the money today?

050 Imagine the same situation, but this time the NKr 100,000 you have won
will be paid out in 1 weeks time. How much would you sell the winning ticket for
then?

056 Imagine again that you have won money in a lottery, but this time the
money will be paid out so that you receive a certain amount every day of the year
 A.L. Bretteille-Jensenr Journal of Health Economics 18 (1999) 393407 407

to come. The lottery offers you the choice between two means of having your
money paid out to you:
A 400 every day for the first half of the year
200 every day for the second half of the year
Total: 110.000,
B 200 every day for the first half of the year
600 every day for the second half of the year
Total: 145.000,
Would you have chosen A or B . . . . . . . . .

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