Addiction, present‐bias, and self‐restraint

Abstract

We study the economic rationale for people to engage in self‐restraint. Specifically, we show that when a good is addictive and harmful, forward‐looking present‐biased consumers have an incentive to restrict their current consumption—below the level at which marginal utility of consumption equals marginal cost—in order to curb their future consumption of the harmful good. If the incentive is sufficiently strong, then present bias may encourage consumers to consume less of the addictive bad today. Finally, we show that a self‐restraint incentive can coexist with a sin tax on the addictive bad.