Behavioral Welfare Evaluation of New Products: The Case of E-cigarettes

Abstract

There is an active debate about how to regulate electronic cigarettes, due to uncertainty about their health effects and whether they are primarily a quit aid or a gateway drug for combustible cigarettes. We model optimal e-cigarette regulation and estimate key parameters. Using tax changes and scanner data, we estimate relatively elastic demand and limited substitution between e-cigarettes and combustible cigarettes. In sample surveys, historical smoking trends for high- and low-vaping demographics were unchanged after e-cigarettes were introduced; this demographic shift-share identification also suggests limited substitution. We field a new quantitative survey of public health experts, who report that vaping is more harmful than previously believed. In our model, the optimal e-cigarette tax is probably higher than the current norm, but Monte Carlo simulations highlight substantial uncertainty. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.