The Econometrics of Rational Addiction: The Case of Cigarettes
This article reexamines the econometric estimation of rational-addiction models considered by Becker, Grossman, and Murphy (BGM) for cigarette consumption. The rational-addiction model poses a number of additional econometric difficulties including endogeneity due to the presence of leads and lags of the dependent variable and serial correlation in the disturbances. BGM considered a fixed-effects two-stage least squares (2SLS) estimator. It is well known that this estimator is biased for fixed T. This article suggests a forward-filter first-difference 2SLS estimator and a generalized method of moments type of estimator that are consistent. Using a panel dataset of 46 states over the period 1963-92, this article estimates the rational-addiction model for cigarettes. Our empirical results are both supportive of the rational-addiction hypothesis and more plausible than BGM's original results.
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Volume (Year): 19 (2001)
Issue (Month): 4 (October)
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