This paper develops and tests a new set of stochastic implications of optimal consumption behavior in the presence of borrowing constraints. In a departure from previous models, the theory shows that liquidity constraints imply a distinctive intertemporal relationship between durable and...

After a discussion of cigarette smoking in the context of the Becker-Murphy (1988) model of rational addictive behavior, demand equations are derived accounting for the tolerance, reinforcement, and withdrawal characteristic of addictive consumption. These are contrasted to equations developed...