The econometrics of rational addiction: The case of cigarettes

Badi H. Baltagi, James M. Griffin

Research output: Contribution to journalArticle

52 Scopus citations

Abstract

This article reexamines the econometric estimation of rational-addiction models considered by Becker, Grossman, and Murphy (BGM) for cigarette consumption. The rational-addiction model poses a number of additional econometric difficulties including endogeneity due to the presence of leads and lags of the dependent variable and serial correlation in the disturbances. BGM considered a fixed-effects two-stage least squares (2SLS) estimator. It is well known that this estimator is biased for fixed T. This article suggests a forward-filter first-difference 2SLS estimator and a generalized method of moments type of estimator that are consistent. Using a panel dataset of 46 states over the period 1963-1992, this article estimates the rational-addiction model for cigarettes. Our empirical results are both supportive of the rational-addiction hypothesis and more plausible than BGM's original results.

Original languageEnglish (US)
Pages (from-to)449-454
Number of pages6
JournalJournal of Business and Economic Statistics
Volume19
Issue number4
DOIs
StatePublished - Oct 1 2001
Externally publishedYes

Keywords

  • Cigarette demand
  • Fixed effects
  • Generalized method of moments
  • Panel data

ASJC Scopus subject areas

  • Statistics and Probability
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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