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

Carlo Ciccarelli (carlo.ciccarelli@uniroma2.it) and J.Paul Elhorst

No 381, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: 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.

Keywords: diffusion; non-stationarity; spatial dependence; common factors; cigarette demand (search for similar items in EconPapers)
JEL-codes: C21 C23 N33 N93 R22 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2016-05-31, Revised 2016-05-31
New Economics Papers: this item is included in nep-geo, nep-hea and nep-ure
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