Rationally Addicted to Drinking and Smoking?

Mikael Bask and Maria Melkersson ()
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Maria Melkersson: SOFI, Stockholms universitet, Postal: Department of Economics, Umeå University, S 106 91 Stockholm, Sweden

No 567, Umeå Economic Studies from 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 (search for similar items in EconPapers)
JEL-codes: D11 D12 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2001-11-01
New Economics Papers: this item is included in nep-hea and nep-mic
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Citations: View citations in EconPapers (2)

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Journal Article: Rationally addicted to drinking and smoking? (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:0567

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