Working Paper: NBER ID: w9073
Authors: Mark Coppejans; Holger Sieg
Abstract: Consumption of addictive goods is subject to habit formation. Forward-looking individuals must, therefore, be concerned about future prices when making current consumption decisions. We study prices for tobacco products based on a unique data set provided by the Bureau of Labor Statistics. Our empirical findings suggest that prices have been highly volatile during the past decade. Price uncertainty has a potentially large impact on the economic well-being of young individuals with relatively low levels of disposable income. We develop a model to study consumption of addictive substances under price uncertainty. Our results indicate that optimal decision rules of low income individuals can crucially depend on subjective beliefs about future prices and the length of the planning horizon. These results imply that tax policies are most effective in reducing teenage cigarette consumption if they credibly alter individuals' beliefs about future prices.
Keywords: price uncertainty; tax policy; addiction; cigarette consumption
JEL Codes: C8; D8; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price uncertainty (D89) | consumption decisions (D12) |
| price uncertainty (D89) | economic wellbeing of young individuals (I31) |
| beliefs about future prices (D84) | consumption decisions (D12) |
| tax policies (H29) | beliefs about future prices (D84) |
| tax policies (H29) | consumption behavior (D10) |
| price stability (E31) | different consumption outcomes (D12) |
| price volatility (G13) | different consumption outcomes (D12) |