Rationally Addicted to Drinking and Smoking?
AbstractWhen modeling demand for addictive consumption goods, the most widely used framework is the rational addiction model proposed by Becker and Murphy (1988). In the present paper, we extend the rational addiction model to include two addictive consumption goods, alcohol and cigarettes. We estimate the aggregate demand for alcohol and cigarettes in Sweden, using aggregate annual time series on sales volumes for the period 1955-1999. OLS estimates are compared to GMM estimates allowing for possible endogeneity of lagged and lead consumption. We first estimate demand for alcohol and cigarettes as separate equations. 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 negative, i.e., alcohol and cigarettes are complements. Since consumption of alcohol and cigarettes are probably simultaneous decisions, we estimate the demand for these goods as a system of equations. Alcohol demand is still positively affected by lagged and lead consumption while cigarette demand is not. The obtained elasticities are now generally smaller compared to when estimating the equations separately.
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Bibliographic InfoPaper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 567.
Length: 19 pages
Date of creation: 01 Nov 2001
Date of revision:
Contact details of provider:
Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
Web page: http://www.econ.umu.se/
More information through EDIRC
Alcohol Demand; Cigarette Demand; Habitual Consumption; Rational Addiction;
Other versions of this item:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-11-05 (All new papers)
- NEP-HEA-2001-11-05 (Health Economics)
- NEP-MIC-2001-11-05 (Microeconomics)
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