In this paper we test the existence of forward-looking behaviour in a multivariate model for alcohol and tobacco consumption. The theoretical framework, based on a dynamic adjustment cost model with forward-looking behaviour, is enhanced to include the intertemporal interactions between the two goods. The analysis of the within-period preferences completes the intertemporal model, allowing to evaluate the static substitutability/complementarity relationships. The empirical strategy consists in a two-step estimation procedure. In a first stage, we obtain the parameters of the demand system, while in a second stage Euler equations are estimated. Results, based on a cohort data set constructed from a series of cross-sections of the Italian Household Budget Survey, reveal a significant complementarity relationship between alcohol and tobacco. Estimation of the Euler equations does not lead to rejection of the hypothesis of intertemporal dependence, providing evidence for a forwardlooking behaviour in alcohol and tobacco consumption. Moreover, we find significant intertemporal interactions that support the adjustment cost setting in a multivariate model with rational expectations.

Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: a Multivariate Dynamic Model

ARISTEI, DAVID;PIERONI, Luca
2010

Abstract

In this paper we test the existence of forward-looking behaviour in a multivariate model for alcohol and tobacco consumption. The theoretical framework, based on a dynamic adjustment cost model with forward-looking behaviour, is enhanced to include the intertemporal interactions between the two goods. The analysis of the within-period preferences completes the intertemporal model, allowing to evaluate the static substitutability/complementarity relationships. The empirical strategy consists in a two-step estimation procedure. In a first stage, we obtain the parameters of the demand system, while in a second stage Euler equations are estimated. Results, based on a cohort data set constructed from a series of cross-sections of the Italian Household Budget Survey, reveal a significant complementarity relationship between alcohol and tobacco. Estimation of the Euler equations does not lead to rejection of the hypothesis of intertemporal dependence, providing evidence for a forwardlooking behaviour in alcohol and tobacco consumption. Moreover, we find significant intertemporal interactions that support the adjustment cost setting in a multivariate model with rational expectations.
2010
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11391/129118
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