We thank Federico Perali and Luca Piccoli for useful comments and suggestions. This paper is part of the research project ‘Dynamic Analysis of Addiction: Intra-household Resource Allocation, Social Welfare and Public Health’, Department of Economics, University of Verona.
Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model*
Article first published online: 16 JUN 2010
© Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2010
Oxford Bulletin of Economics and Statistics
Volume 72, Issue 4, pages 428–457, August 2010
How to Cite
Aristei, D. and Pieroni, L. (2010), Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model. Oxford Bulletin of Economics and Statistics, 72: 428–457. doi: 10.1111/j.1468-0084.2010.00590.x
- Issue published online: 16 JUN 2010
- Article first published online: 16 JUN 2010
- Final Manuscript Received: December 2009
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.