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An Empirical Analysis of Adult Cigarette Demand

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  • John A. Tauras

Abstract

This paper examines the magnitude of prediction bias when employing a traditional two-part model of adult cigarette demand. In particular, this paper is the first econometric study to investigate the bias associated with naively assuming that error retransformation is homoscedastic in price. The traditional two part model that is estimated in this paper models the propensity to smoke and the intensity of smoking separately. A modified two-part model that allows the error retransformation to be heteroscedastic in price is estimated. The results from this research imply that the price of cigarettes is a very important determinant of adult cigarette demand. The estimates imply that policies to increase the price of cigarettes will reduce not only prevalence of smoking, but will also decrease the number of cigarettes smoked by smokers. However, the price coefficients obtained from the conditional demand equations are biased away from zero when using the traditional log-transformed dependent variable. The price elasticities are biased. A generalized linear model yielded conditional price elasticities less than one-half of those obtained using the traditional method.

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File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume31/V31N3P361_375.pdf
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Bibliographic Info

Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 31 (2005)
Issue (Month): 3 (Summer)
Pages: 361-375

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Handle: RePEc:eej:eeconj:v:31:y:2005:i:3:p:361-375

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Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
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Web page: http://www.ramapo.edu/eea/journal.html
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  1. Russell Davidson & James G. MacKinnon, 1980. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Working Papers 378, Queen's University, Department of Economics.
  2. Frank J. Chaloupka, 1990. "Rational Addictive Behavior and Cigarette Smoking," NBER Working Papers 3268, National Bureau of Economic Research, Inc.
  3. Manning, Willard G. & Mullahy, John, 2001. "Estimating log models: to transform or not to transform?," Journal of Health Economics, Elsevier, vol. 20(4), pages 461-494, July.
  4. Blough, David K. & Madden, Carolyn W. & Hornbrook, Mark C., 1999. "Modeling risk using generalized linear models," Journal of Health Economics, Elsevier, vol. 18(2), pages 153-171, April.
  5. Jonathan Gruber & Botond Koszegi, 2000. "Is Addiction "Rational"? Theory and Evidence," NBER Working Papers 7507, National Bureau of Economic Research, Inc.
  6. Jonathan Gruber & Jonathan Zinman, 2001. "Youth Smoking in the United States: Evidence and Implications," NBER Chapters, in: Risky Behavior among Youths: An Economic Analysis, pages 69-120 National Bureau of Economic Research, Inc.
  7. Cragg, John G, 1971. "Some Statistical Models for Limited Dependent Variables with Application to the Demand for Durable Goods," Econometrica, Econometric Society, vol. 39(5), pages 829-44, September.
  8. Philip DeCicca & Donald Kenkel & Alan Mathios, 2002. "Putting Out the Fires: Will Higher Taxes Reduce the Onset of Youth Smoking?," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 144-169, February.
  9. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
  10. Mullahy, John, 1998. "Much ado about two: reconsidering retransformation and the two-part model in health econometrics," Journal of Health Economics, Elsevier, vol. 17(3), pages 247-281, June.
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Cited by:
  1. John A. Tauras, 2005. "Can public policy deter smoking escalation among young adults?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 24(4), pages 771-784.
  2. John A. Tauras & Lan Liang, 2003. "The Impact of Physician Intervention and Tobacco Control Policies on Average Daily Cigarette Consumption Among Adult Smokers," NBER Working Papers 9790, National Bureau of Economic Research, Inc.
  3. Trujillo Sánchez, Jorge Enrique, 2013. "Efecto de las políticas públicas de vigilancia, control y regulación en el mercado del tabaco en Colombia
    [Effects of the monitoring, control and regulation public policies in the tobacco market
    ," MPRA Paper 46871, University Library of Munich, Germany.
  4. Pieroni, Luca & Salmasi, Luca, 2012. "Does cigarette smoking affect body weight? causal estimates from the clean indoor air law discontinuity," MPRA Paper 38338, University Library of Munich, Germany.

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