Working Paper: NBER ID: w3322
Authors: Gary S. Becker; Michael Grossman; Kevin M. Murphy
Abstract: We use a framework suggested by a model of rational addiction to analyze empirically the demand for cigarettes. The data consist of per capita cigarettes sales (in packs) annually by state for the period 1955 through 1985. The empirical results provide support for the implications of a rational addiction model that cross price effects are negative (consumption in different periods are complements), that long-run price responses exceed short-run responses, and that permanent price effects exceed temporary price effects. A 10 percent permanent increase in the price of cigarettes reduces current consumption by 4 percent in the short run and by 7.5 percent in the long run. In contrast, a 10 percent increase in the price for only one period decreases consumption by only 3 percent. In addition, a one period price increase of 10 percent reduces consumption in the previous period by approximately .7 percent and consumption in the subsequent period by 1.5 percent. These estimates illustrate the importance of the intertemporal linkages in cigarette demand implied by rational addictive behavior.
Keywords: Cigarette Consumption; Rational Addiction; Price Elasticity
JEL Codes: I12; D12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price increase (D49) | Current consumption decrease (E21) |
| One-period price increase (E30) | Current consumption decrease (E21) |
| One-period price increase (E30) | Previous period consumption decrease (E21) |
| One-period price increase (E30) | Subsequent period consumption decrease (E21) |
| Past consumption (D12) | Current consumption increase (E21) |