Back to the future? Habits and rational addiction in UK tobacco and alcohol demand

Luca Fanelli () and Mario Mazzocchi

Quaderni di Dipartimento from Department of Statistics, University of Bologna

Abstract: This paper develops a dynamic modeling approach for the Almost Ideal Demand System, which is consistent with the rational addiction theory. The forward-looking hypothesis is combined with that of convex adjustment costs in the presence of non-stationary cointegrated variables. Estimation is based on a two-step strategy based on cointegration and GMM techniques. Results on UK tobacco and alcohol demand support the adopted specifications and highlight the degree of complementarity between addictive goods.

JEL-codes: C32 D12 I12 (search for similar items in EconPapers)
Date: 2004
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