Abstract
This paper examines whether tobacco expenditure leads to the crowding out or crowding in of different expenditure items in South Africa. We apply genetic matching to expenditure quartiles of the 2010/2011 South African Income and Expenditure Survey. Genetic matching is a more appealing approach for dealing with the endogeneity of tobacco expenditure that often plagues studies using systems of demand equations. Further, genetic matching provides transparent measures of covariate balance giving the analyst objective means of assessing match success. We find that the poorest tobacco consuming households in South Africa consistently allocate smaller budget shares towards food items than non-smoking households. Specifically, we find that dairy, fruits, nuts and oils are displaced in favour of tobacco expenditure in the two poorest quartiles. Unsurprisingly, food items are never displaced for households in the top two quartiles, given these households’ greater access to resources. Like other studies in the literature, we find that tobacco expenditure consistently crowds-in alcohol across all quartiles confirming the strong complementarities between the two.
Highlights
According to economic theory, consumer behaviour is best understood within the confines of a demand system
In the case of tobacco products, a statistically significant positive cross-price elasticity between, say, tobacco and food implies that food expenditure can be crowded-out by tobacco expenditure because increases in tobacco prices increase the demand for food [1]
Using genetic matching across expenditure quartiles, we find that the poorest tobacco consuming households in South Africa systematically allocate smaller budget shares towards some food categories than non-smoking households
Summary
Consumer behaviour is best understood within the confines of a demand system. Demand systems rely upon the accessibility of price data, among other data requirements, for reliable estimation. Price data allow for the estimation of crossprice elasticities and these elasticities determine the substitutability or complementarity of various goods. In the case of tobacco products, a statistically significant positive cross-price elasticity between, say, tobacco and food implies that food expenditure can be crowded-out by tobacco expenditure because increases in tobacco prices increase the demand for food [1]. It can be difficult to access the depth of price data needed for the estimation of cross-price elasticities in many low- and middle-income countries (LMICs). Researchers working on these countries have adopted different approaches to analyzing the effect of tobacco on household expenditure behaviour
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