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Gary S. Becker, Michael Grossman, Kevin M. Murphy
NBER Working Paper No. 3322 (Also Reprint No. r1901)*
Issued in August 1994
NBER Program(s): HE
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---- Abstract -----
We use a framework suggested by a model of rational addiction to analyze
empirically the demand for cigarettes. The data consist of per capita
cigarettes sales (in packs) annually by state for the period 1955 through 1985.
The empirical results provide support for the implications of a rational
addiction model that cross price effects are negative (consumption in different
periods are complements), that long-run price responses exceed short-run
responses, and that permanent price effects exceed temporary price effects. A
10 percent permanent increase in the price of cigarettes reduces current
consumption by 4 percent in the short run and by 7.5 percent in the long run.
In contrast, a 10 percent increase in the price for only one period decreases
consumption by only 3 percent. In addition, a one period price increase of 10
percent reduces consumption in the previous period by approximately .7 percent
and consumption in the subsequent period by 1.5 percent. These estimates
illustrate the importance of the intertemporal linkages in cigarette demand
implied by rational addictive behavior.
*Published: American Economic Review, Vol. 84, no. 3, pp. 396-418, (June 1994).
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