Rational Addiction, Cointegration and Tobacco and Alcohol Demand

Fanelli, Luca ; Mazzocchi, Mario (2008) Rational Addiction, Cointegration and Tobacco and Alcohol Demand. Bologna, IT: Dipartimento di Scienze Statistiche "Paolo Fortunati", Alma Mater Studiorum Università di Bologna, p. 39. DOI 10.6092/unibo/amsacta/2417. In: Quaderni di Dipartimento. Serie Ricerche ISSN 1973-9346.
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In this paper we embed the Almost Ideal Demand System within a dynamic disequilibrium model, and derive a set of interrelated Euler equations which characterizes optimal consumption allocations under adjustment costs. It is argued that when applied to alcohol and tobacco expenditure, the proposed specification features the rational addiction hypothesis, as both forward-looking rational behaviour and habit formation are explicitly accounted for. The suggested estimation approach controls for potential nonstationarity in the underlying time-series. Results relative to UK tobacco and alcohol demand support the adopted specifications and highlight the degree of complementarity between addictive goods.

Document type
Monograph (Working Paper)
Fanelli, Luca
Mazzocchi, Mario
Cointegration, Forward-looking behaviour, Rational Addiction, VAR model Cointegrazione, Comportamento forward-looking, Dipendenza Razionale, Modelli VAR
Deposit date
19 Feb 2008
Last modified
16 May 2011 12:07

Other metadata

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