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

  • David Aristei

    ()

    (Department of Economics (University of Verona))

  • Luca Pieroni

    ()

    (Department of Economics, Finance and Statistics (University of Perugia))

In this paper we test the existence of rational habit formation 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 the first stage, the parameters of the demand system are obtained, while in a second stage Euler equations are estimated by a dynamic fixed-effects panel data model. Estimation results, based on a cohort dataset constructed from a series of crosssections of the ISTAT Italian Household Budget Survey, reveal a significant complementarity relationship between alcohol and tobacco. The Euler system estimation does not reject the hypothesis of intertemporal dependence, providing support for a forward-looking behaviour in alcohol and tobacco consumption. Moreover, we find significant intertemporal interactions for tobacco adjustments, while alcohol consumption seems to follow only its own adjustment dynamics.

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Paper provided by University of Verona, Department of Economics in its series Working Papers with number 38.

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Length: 44
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:ver:wpaper:38
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  1. Luca Fanelli, 2006. "Dynamic adjustment cost models with forward-looking behaviour," Econometrics Journal, Royal Economic Society, vol. 9(1), pages 23-47, 03.
  2. Rosalie Liccardo Pacula, 1997. "Letter: Economic modelling of the gateway effect," Health Economics, John Wiley & Sons, Ltd., vol. 6(5), pages 521-524.
  3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  4. Gardes, Francois & Duncan, Greg J. & Gaubert, Patrice & Gurgand, Marc & Starzec, Christophe, 2005. "Panel and Pseudo-Panel Estimation of Cross-Sectional and Time Series Elasticities of Food Consumption: The Case of U.S. and Polish Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 242-253, April.
  5. Weissenberger, Edgar, 1986. "An intertemporal system of dynamic consumer demand functions," European Economic Review, Elsevier, vol. 30(4), pages 859-891, August.
  6. Angus Deaton & Christina Paxson, 2000. "Growth and Saving Among Individuals and Households," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 212-225, May.
  7. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
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