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Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model

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  • David Aristei
  • Luca Pieroni

Abstract

In this paper we test the existence of forward-looking behaviour in a multivariate model for alcohol and tobacco consumption. The theoretical framework, based on a dynamic adjustment cost model with forward-looking behaviour, is enhanced to include the intertemporal interactions between the two goods. The analysis of the within-period preferences completes the intertemporal model, allowing to evaluate the static substitutability/complementarity relationships. The empirical strategy consists in a two-step estimation procedure. In a first stage, we obtain the parameters of the demand system, while in a second stage Euler equations are estimated. Results, based on a cohort data set constructed from a series of cross-sections of the Italian Household Budget Survey, reveal a significant complementarity relationship between alcohol and tobacco. Estimation of the Euler equations does not lead to rejection of the hypothesis of intertemporal dependence, providing evidence for a forward-looking behaviour in alcohol and tobacco consumption. Moreover, we find significant intertemporal interactions that support the adjustment cost setting in a multivariate model with rational expectations. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2010.

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  • David Aristei & Luca Pieroni, 2010. "Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(4), pages 428-457, August.
  • Handle: RePEc:bla:obuest:v:72:y:2010:i:4:p:428-457
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    Cited by:

    1. L. Pieroni & L. Salmasi, 2015. "Does Cigarette Smoking Affect Body Weight? Causal Estimates from the Clean Indoor Air Law Discontinuity," Economica, London School of Economics and Political Science, vol. 82(328), pages 671-704, October.
    2. Pieroni, Luca & Salmasi, Luca, 2016. "The effect of smoking habit changes on body weight: Evidence from the UK," Economics & Human Biology, Elsevier, vol. 20(C), pages 1-13.
    3. Liberati, Paolo & Paradiso, Massimo, 2014. "Sulla composizione dell'accisa sui tabacchi: un'ipotesi di modifica del sistema di tassazione in Italia
      [On the structure of the excise taxes on tobacco: A reform proposal for Italy]
      ," MPRA Paper 55906, University Library of Munich, Germany.
    4. Pieroni, Luca & Salmasi, Luca, 2012. "Smoking habit changes and body weight: causal estimates from the British Household Panel Survey," MPRA Paper 43465, University Library of Munich, Germany.

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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