Citation

Aristei, David & Pieroni, Luca (2010). Habits, complementarities and heterogeneity in alcohol and tobacco demand: a multivariate dynamic model*. Oxford Bulletin of Economics and Statistics, 72(4), 428-457.

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 forward-looking 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.

URL

http://dx.doi.org/10.1111/j.1468-0084.2010.00590.x

Reference Type

Journal Article

Year Published

2010

Journal Title

Oxford Bulletin of Economics and Statistics

Author(s)

Aristei, David
Pieroni, Luca