Umeå Economic Studies,
Umeå University, Department of Economics

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

JEL-codes: D11; D12

19 pages, November 1, 2001

Full text files

DownloadAsset.action...Id=3&assetKey=ues567  

Download statistics

• Umeå University, Department of Economics
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to David Skog ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:13:51.