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Rational Addiction with Optimal Inventories: Theory and Evidence from Cigarette Purchases in Japan

Author

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  • Junmin Wan

    (Osaka School of International Public Policy, Osaka University)

Abstract

A 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.

Suggested Citation

  • Junmin Wan, 2004. "Rational Addiction with Optimal Inventories: Theory and Evidence from Cigarette Purchases in Japan," Discussion Papers in Economics and Business 04-01-Rev, Osaka University, Graduate School of Economics, revised Feb 2006.
    • Handle: RePEc:osk:wpaper:0401r
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    Cited by:

    1. Junmin Wan, 2004. "Consumption of Cigarettes, Nicotine, and Tar under Anti-smoking Policies: Japan as a Case Study," Discussion Papers in Economics and Business 04-12-Rev, Osaka University, Graduate School of Economics, revised Mar 2006.

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    More about this item

    Keywords

    Enforcement; rational addiction; tax increase; hoarding; optimal stopping; asymmetric price effect; omitted variable;
    All these keywords.

    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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