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An Empirical Analysis of Adult Cigarette Demand

  • John A. Tauras

This paper examines the magnitude of prediction bias when employing a traditional two-part model of adult cigarette demand. In particular, this paper is the first econometric study to investigate the bias associated with naively assuming that error retransformation is homoscedastic in price. The traditional two part model that is estimated in this paper models the propensity to smoke and the intensity of smoking separately. A modified two-part model that allows the error retransformation to be heteroscedastic in price is estimated. The results from this research imply that the price of cigarettes is a very important determinant of adult cigarette demand. The estimates imply that policies to increase the price of cigarettes will reduce not only prevalence of smoking, but will also decrease the number of cigarettes smoked by smokers. However, the price coefficients obtained from the conditional demand equations are biased away from zero when using the traditional log-transformed dependent variable. The price elasticities are biased. A generalized linear model yielded conditional price elasticities less than one-half of those obtained using the traditional method.

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File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume31/V31N3P361_375.pdf
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Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 31 (2005)
Issue (Month): 3 (Summer)
Pages: 361-375

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Handle: RePEc:eej:eeconj:v:31:y:2005:i:3:p:361-375
Contact details of provider: Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
Phone: (201) 684-7346
Web page: http://www.ramapo.edu/eea/journal.html
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  1. Chaloupka, Frank, 1991. "Rational Addictive Behavior and Cigarette Smoking," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 722-42, August.
  2. Blough, David K. & Madden, Carolyn W. & Hornbrook, Mark C., 1999. "Modeling risk using generalized linear models," Journal of Health Economics, Elsevier, vol. 18(2), pages 153-171, April.
  3. Willard G. Manning & John Mullahy, 1999. "Estimating Log Models: To Transform or Not to Transform?," NBER Technical Working Papers 0246, National Bureau of Economic Research, Inc.
  4. Mullahy, John, 1998. "Much ado about two: reconsidering retransformation and the two-part model in health econometrics," Journal of Health Economics, Elsevier, vol. 17(3), pages 247-281, June.
  5. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1990. "An Empirical Analysis of Cigarette Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 61, Chicago - Center for Study of Economy and State.
  6. Philip DeCicca & Donald Kenkel & Alan Mathios, 2002. "Putting Out the Fires: Will Higher Taxes Reduce the Onset of Youth Smoking?," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 144-169, February.
  7. Cragg, John G, 1971. "Some Statistical Models for Limited Dependent Variables with Application to the Demand for Durable Goods," Econometrica, Econometric Society, vol. 39(5), pages 829-44, September.
  8. Jonathan Gruber & Jonathan Zinman, 2001. "Youth Smoking in the United States: Evidence and Implications," NBER Chapters, in: Risky Behavior among Youths: An Economic Analysis, pages 69-120 National Bureau of Economic Research, Inc.
  9. Russell Davidson & James G. MacKinnon, 1980. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Working Papers 378, Queen's University, Department of Economics.
  10. Jonathan Gruber & Botond Koszegi, 2000. "Is Addiction "Rational"? Theory and Evidence," NBER Working Papers 7507, National Bureau of Economic Research, Inc.
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