Working Paper: NBER ID: w15124
Authors: Padmaja Ayyagari; Partha Deb; Jason Fletcher; William T. Gallo; Jody L. Sindelar
Abstract: This paper estimates the price elasticity of demand for alcohol using Health and Retirement Survey data. To account for unobserved heterogeneity in price responsiveness, we use finite mixture models. We recover two latent groups, one is significantly responsive to price but the other is unresponsive. Differences between these two groups can be explained in part by the behavioral factors of risk aversion, financial planning horizon, forward looking and locus of control. These results have policy implications. Only a subgroup responds significantly to price. Importantly, the unresponsive group drinks more heavily, suggesting that a higher price could fail to curb drinking by those most likely to cause negative externalities. In contrast, those least likely to impose costs on others are more responsive, thus suffering greater deadweight loss yet with less prevention of negative externalities.
Keywords: Alcohol Taxation; Price Elasticity; Behavioral Economics
JEL Codes: I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price (D41) | Number of drinks consumed (Component 1) (C29) |
| Price (D41) | Number of drinks consumed (Component 2) (L66) |
| Higher risk aversion (D81) | Membership in Component 1 (D71) |
| Longer financial planning horizon (G19) | Membership in Component 1 (D71) |