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

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  • L. Fanelli
  • M. Mazzocchi

Abstract

This paper develops a dynamic modeling 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.

Suggested Citation

  • L. Fanelli & M. Mazzocchi, 2004. "Back to the future? Habits and rational addiction in UK tobacco and alcohol demand," Quaderni di Dipartimento 0, Department of Statistics, University of Bologna.
    • Handle: RePEc:bot:quadip:wpaper:10
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    JEL classification:

    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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