Rational Addiction with Optimal Inventories: Theory and Evidence from Cigarette Purchases in Japan
AbstractA rational addiction (RA) model with optimal inventories is developed and empirically tested. Consumers hoard addictive goods when they anticipate a future price increase. The optimal inventory period increases with the size of the price hike but decreases with inventory costs. The absolute value of the price elasticity of demand is smaller in the case of a price increase than in the case of a price decrease. Evidence from daily cigarette purchases in Japan is consistent with this asymmetric price effect. If inventories are ignored, monthly cigarette purchases reject the RA hypothesis inasmuch as inventories are an omitted variable correlated with price; but this hypothesis finds support if inventories are controlled for.
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Bibliographic InfoPaper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 04-01-Rev.
Length: 48 pages
Date of creation: Jan 2004
Date of revision: Feb 2006
Enforcement; rational addiction; tax increase; hoarding; optimal stopping; asymmetric price effect; omitted variable;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
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