Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model

30 Pages Posted: 21 Jun 2010

See all articles by David Aristei

David Aristei

University of Perugia

Luca Pieroni

University of Perugia - Department of Economics

Abstract

In this paper we test the existence of forward-looking behaviour in a multivariate model for alcohol and tobacco consumption. The theoretical framework, based on a dynamic adjustment cost model with forward-looking behaviour, is enhanced to include the intertemporal interactions between the two goods. The analysis of the within-period preferences completes the intertemporal model, allowing to evaluate the static substitutability/complementarity relationships. The empirical strategy consists in a two-step estimation procedure. In a first stage, we obtain the parameters of the demand system, while in a second stage Euler equations are estimated. Results, based on a cohort data set constructed from a series of cross-sections of the Italian Household Budget Survey, reveal a significant complementarity relationship between alcohol and tobacco. Estimation of the Euler equations does not lead to rejection of the hypothesis of intertemporal dependence, providing evidence for a forward-looking behaviour in alcohol and tobacco consumption. Moreover, we find significant intertemporal interactions that support the adjustment cost setting in a multivariate model with rational expectations.

Suggested Citation

Aristei, David and Pieroni, Luca, Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model. Oxford Bulletin of Economics and Statistics, Vol. 72, Issue 4, pp. 428-457, August 2010, Available at SSRN: https://ssrn.com/abstract=1626528 or http://dx.doi.org/10.1111/j.1468-0084.2010.00590.x

David Aristei (Contact Author)

University of Perugia ( email )

Via Pascoli 22
Perigoa, 06121
Italy

Luca Pieroni

University of Perugia - Department of Economics ( email )

via Pascoli, 20
PG 06123 Perugia, 06123
Italy

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