In Vino Veritas: The Economics of Drinking
Erasmus School of Economics; Tinbergen Institute
December 1, 2009
Ruhr Economic Paper No. 158
It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one’s actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a “social lubricant” and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a trade-off between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.
Number of Pages in PDF File: 25
Keywords: Asymmetric Information, Drinking, Drug Consumption, Signaling, Social Norms
JEL Classification: C72, D82
Date posted: January 7, 2010
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