Looking at the taxation effect on cross-state smuggling using rational addiction models

Abstract

Purpose The purpose of this paper is to show how the taxation effect on cross-state smuggling can be a valid instrumental variable for lagged and future consumption together with the local price series. Design/methodology/approach On the same grounds, the authors raise the question using the rational-addiction model by noticing that the neighboring price differentials really capture the possible smuggling or bootlegging effects. Findings Moreover, the authors look into the extended model to test the key condition that the expected future financial consequences will affect the current consumptions. Originality/value This supports the rational-addiction model, which can be used to plan the taxation for the forward-looking consumptions.