Umeå Economic Studies, Department of Economics, Umeå University
No 567:
Rationally Addicted to Drinking and Smoking?
Mikael Bask ()
and Maria Melkersson ()
Abstract: When modeling demand for addictive consumption goods, the
most widely used framework is the rational addiction model proposed by
Becker and Murphy (1988). In the present paper, we extend the rational
addiction model to include two addictive consumption goods, alcohol and
cigarettes. We estimate the aggregate demand for alcohol and cigarettes in
Sweden, using aggregate annual time series on sales volumes for the period
1955-1999. OLS estimates are compared to GMM estimates allowing for
possible endogeneity of lagged and lead consumption. We first estimate
demand for alcohol and cigarettes as separate equations. It is found that
alcohol demand is quite well described by the rational addiction model
while the same is not true for cigarettes. The own-price elasticities are
negative, and alcohol demand is more elastic than cigarette demand. The
cross-price elasticities are negative, i.e., alcohol and cigarettes are
complements. Since consumption of alcohol and cigarettes are probably
simultaneous decisions, we estimate the demand for these goods as a system
of equations. Alcohol demand is still positively affected by lagged and
lead consumption while cigarette demand is not. The obtained elasticities
are now generally smaller compared to when estimating the equations
separately.
Keywords: Alcohol Demand; Cigarette Demand; Habitual Consumption; Rational Addiction; (follow links to similar papers)
JEL-Codes: D11; D12; (follow links to similar papers)
19 pages, November 1, 2001
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