Law of Demand

by Don Boudreaux on February 14, 2006

in The Economy

My colleague Thomas Stratmann and former GMU student (now Florida State law professor) Jon Klick find evidence for the law of demand: as the cost of some activity falls, people engage in that activity more readily.  Their recent paper, published in the hot-off-the-press Journal of Legal Studies, is entitled "Subsidizing Addiction: Do State Health Insurance Mandates Increase Alcohol Consumption?"

Here’s the abstract:

A model of addiction in which individuals are forward looking implies that as the availability of addiction treatment options grows, individuals will consume more of an addictive good. We test this implication using cross-state variation in the adoption of mental health parity mandates that include substance abuse treatments. We examine the effects of these mandates on the consumption of alcohol and find that parity legislation leads to an increase in alcohol consumption. To account for the possible endogeneity of the adoption of mental health parity mandates, we perform an instrumental variables analysis and find that the ordinary least squares estimation significantly underestimates the insurance effect on alcohol consumption.

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