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We propose a dynamic panel data approach to estimate a model that integrates the Becker-Murphy theory of rational addiction with the Grossman model of health investment. We dene an individual’s lifetime smoking consumption and investments in health capital as simultaneous choices within a single optimisation problem. We show that this can be estimated using GMM system estimation of two stand-alone single fourth-order dierence equations of health capital and smoking. These preserve roots and fundamental dynamics of the original system of four interrelated rst-order equations. Monte Carlo simulations conrm that this reduced-form dynamic estimation also produces very similar estimates to the ones of the initial system of equations. We argue that, in the presence of long panel data, this approach may provide a feasible alternative for the estimation of a complex life-cycle model of human capital

Dynamic panel data estimation of an integrated Grossman and Becker–Murphy model of health and addiction