When modelling demand for addictive consumption goods, the most widely used framework is the rational addiction model proposed by Becker and Murphy. This paper extends the rational addiction model to include two addictive consumption goods, alcohol and cigarettes, and using aggregate annual time series on sales volumes for the period 1955-1999, estimates the aggregate demand for these goods in Sweden, where OLS estimates are compared to GMM estimates allowing for possible endogeneity of lagged and lead consumption. First, the demand for alcohol and cigarettes are estimated as separate equations and it is found that alcohol demand is quite well described by the rational addiction model while the same is not true for cigarettes. The own-price elasticities are negative, and alcohol demand is more elastic than cigarette demand. The cross-price elasticities are also negative, showing that alcohol and cigarettes are complements. Since consumption of alcohol and cigarettes are probably simultaneous decisions, the demand for these goods is estimated as a system of equations and it is found that alcohol demand is still positively affected by lagged and lead consumption while cigarette demand is not. It is also found that the elasticities obtained are now generally smaller compared to when estimating the equations separately.
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Article provided by Taylor and Francis Journals in its journal Applied Economics.
Volume (Year): 36 (2004) Issue (Month): 4 (March) Pages: 373-381 Download reference. The following formats are available: HTML
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Frank J. Chaloupka & Kenneth E. Warner, 1999.
"The Economics of Smoking,"
NBER Working Papers
7047, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Chaloupka, Frank J. & Warner, Kenneth E., 2000.
"The economics of smoking,"
Handbook of Health Economics,
in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 29, pages 1539-1627
Elsevier.
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