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Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model *
Author(s) -
Aristei David,
Pieroni Luca
Publication year - 2010
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2010.00590.x
Subject(s) - complementarity (molecular biology) , econometrics , multivariate statistics , economics , consumption (sociology) , budget constraint , generalized method of moments , euler equations , alcohol consumption , microeconomics , panel data , alcohol , mathematics , statistics , biochemistry , mathematical analysis , social science , genetics , chemistry , sociology , biology
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.