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A Spatial Diffusion Model with Common Factors and an Application to Cigarette Consumption

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This paper adopts a dynamic spatial panel data model with common factors to explain the non-stationary diffusion process of cigarette consumption across 69 Italian provinces over the period 1877-1913. The Pesaran (2015) CD-test and the exponent a-test of Bailey et al. (2015) are used to show that both weak and strong cross-sectional dependence are important drivers of the propagation of cigarette demand over this period. Stability tests on the coefficients and the CD-test on the residuals of the model are used to verify whether the data and both forms of cross-sectional dependence are modeled adequately. Cigarettes are found to be a normal good with an income elasticity of 0.4 and a price elasticity -0.4 in the long term. The price elasticity can be decomposed into a direct effect of -0.54 in the own region and a spillover effect to other regions of 0.15. This positive spillover effect is in line with previous spatial econometric studies which investigated cigarette demand in the U.S. states over a more recent period.

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  • Carlo Ciccarelli & Jean Paul Elhorst, 2016. "A Spatial Diffusion Model with Common Factors and an Application to Cigarette Consumption," CEIS Research Paper 381, Tor Vergata University, CEIS, revised 31 May 2016.
  • Handle: RePEc:rtv:ceisrp:381
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    1. Parent, Olivier & LeSage, James P., 2010. "A spatial dynamic panel model with random effects applied to commuting times," Transportation Research Part B: Methodological, Elsevier, vol. 44(5), pages 633-645, June.
    2. Natalia Bailey & George Kapetanios & M. Hashem Pesaran, 2016. "Exponent of Cross‐Sectional Dependence: Estimation and Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(6), pages 929-960, September.
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    6. Carlo Ciccarelli & Jacob Weisdorf, 2016. "The Effect of the Italian Unification on the Comparative Regional Development in Literacy, 1821-1911," CEIS Research Paper 392, Tor Vergata University, CEIS, revised 25 Jul 2016.
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    More about this item

    Keywords

    diffusion; non-stationarity; spatial dependence; common factors; cigarette demand;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • N33 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - Europe: Pre-1913
    • N93 - Economic History - - Regional and Urban History - - - Europe: Pre-1913
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand

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