Abstract
Using aggregated panel data taken from three waves of the Indonesian Family Life Survey (1993–2000), this article tests the myopic addiction behaviour of cigarette demand. Sensitivity analysis is done by examining a rational addiction behavior of cigarette demand. The results provide support for myopic addiction. The short- and long-run price elasticities of cigarette demand are estimated at −0.28 and −0.73 respectively. Excise taxes are more likely to act as an effective tobacco control in the long-run rather than a major source of government revenue.
Highlights
Economic models of addiction can be divided into three groups: imperfectly rational addiction, rational addiction and myopic addiction [1]
Is a vector of exogenous variable that affect consumption of cigarettes including disposable income, age, employment status, and the presence of children less than 14 years of age, vi is an individual fixed effect controlling for time-invariant preferences and marginal utility of wealth), dt is a time dummy controlling for unanticipated macro changes in wealth, and εit is the error term
Durbin-Wu Hausman and Hausman-Wu statistical tests. This is a Likelihood Ratio (LR) test distributed as a x2 with 1 degree of freedom
Summary
Economic models of addiction can be divided into three groups: imperfectly rational addiction, rational addiction and myopic addiction [1]. The last assumes individuals recognize the dependence of current addictive good consumption on past consumption, but ignore the impact of current and past choices on future consumption decisions when making current choices. Researchers investigating myopic addiction always build consumption history into models, but ignore anticipated future changes. There are a number of studies investigating myopic addiction in both pooled and time series frameworks. Empirical applications of myopic addiction in cigarette consumption include, inter alia, Baltagi and Levin [2,3]. Alternative dynamic specifications of addictive cigarette consumption are found in Cameron’s survey [4]
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