Back to the future? Habits and rational addiction in UK tobacco and alcohol demand.

Fanelli, Luca ; Mazzocchi, M. (2004) Back to the future? Habits and rational addiction in UK tobacco and alcohol demand. [Preprint]

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Abstract

This paper develops a feasible dynamic modelling approach for the Almost Ideal Demand System, which is consistent with the rational addiction theory. The forward-looking hypothesis is combined with that of convex adjustment costs in the presence of non-stationary cointegrated variables. Estimation is based on a two-step strategy based on cointegration and GMM techniques. Results on UK tobacco and alcohol demand support the adopted specifications and highlight the degree of complementarity between addictive goods.

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