Looking at the taxation effect on cross-state smuggling using rational addiction models

Purpose - The purpose of this paper is to show how the taxation effect on cross-state smuggling can be a valid instrumental variable for lagged and future consumption together with the local price series. Design/methodology/approach - On the same grounds, the authors raise the question using the rational-addiction model by noticing that the neighboring price differentials really capture the possible smuggling or bootlegging effects. Findings - Moreover, the authors look into the extended model to test the key condition that the expected future financial consequences will affect the current consumptions. Originality/value - This supports the rational-addiction model, which can be used to plan the taxation for the forward-looking consumptions.