Rational Behavior in Cigarette Consumption: Evidence from the United States

* Assistant Professor in Economics, Finance and Global Business department, William Paterson University, New Jersey, email: songy2@wpunj.edu Rational Behavior in Cigarette Consumption: Evidence from the United States 3 lower current consumption, indicating forward-looking behavior. However, Gruber and Koszegi (2001) assert that the addictive rational model is valid when time preference is held constant. If time preference varies, the "policy" of addictive cigarette consumption will change. Gruber and Koszegi (2001) develop an alternative model, in which they embed in the Becker-Murphy framework the hyperbolic discounting preferences provided by Laibson (1997). Becker et al. (1994) can be a special case of the Gruber and Koszegi (2001) model. In order to achieve better estimation, Becker et al. (1994) put proper restrictions on the discount factor (from 0.7 to 0.95). In contrast, instead of calibrate the discount factor, Gruber and Koszegi (2001) estimate that value from the empirical data. While Gruber and Koszegi (2001) also use the high frequency monthly data on cigarette consumption, they find that the new model and new data indicate that future prices have an effect on current consumption. The results are similar to those of Becker et al. (1994). In order to test the applicability of the rational addictive and myopic models, researchers have employed various data. Instead of the state aggregate sales data used by Becker et al. (1994), Levy (2010) applies the individual-level annual data in the National Vitality Statistics Natality Data (NHIS). He finds that while young smokers only respond to the current cigarette price, mature smokers respond to both current and expected future prices. Labeaga et al. (1999) also applies the individual-level data to the Becker et al. (1994) model. Kim (2005) applies three measurements of consumption to myopic and rational models: the proportion of smokers, per capita consumption, and the average daily cigarette consumption of smokers. Lanoie and Leclair (1998) use the Canadian data at the state level for the period from 1954 to 2009; Hu et al. (1994) analyze the data from 11 western states over the period 1967-1990; and in order to provide more intuitive explanations for addictive behavior, Suranovic et al. (1999) add the quitting cost ("frustrated or anxious or restless") and the negative effects of smoking (later appearing in an individual’s life) to the model. All of these studies support the rational addictive model and reject the myopic model. Scholars have also employed different estimation models. Because individual level data yield a distribution for disturbance exhibiting non-constant variance, economists have resorted to a two-part model: first, a logit or probit specification and, second, an ordinary least squares (OLS) model. In practice, people subject the dependent variable of the OLS regression model to a logarithmic transformation in order to stabilize non-constant error variances. Mullaphy (1998), Manning (1998), Manning and Mullaphy (2001) and Tauras (2005) have each investigated the bias associated with using log-transformed dependent variables andconclude that the price coefficients obtained from a conditional demand equation are biased when using a traditional log-transformed dependent variable. In sum, the literature suggests that cigarettes are addictive and, furthermore, that cigarette addiction follows the rational behavior model. In this study, I use a broader data set to verify this result, extending the Becker et al. (1994) data to include the years 1954 to 2009. I employ both the myopic and the rational behavior model and include two measures of consumption: (i) per capita cigarette consumption (in millions of packages) from state level annual data from 1954 to 2009 (Tax Burden on Tobacco); and (ii), annual smoking participation (current smoking status) data from 1984 to 2009 (BRFSS). The results show that, a) smoking consumption is a rational addictive behavior and that, b) as prices decrease, consumption increases significantly, but smoking participation does not change much. The results verify that cigarette consumption follows rational addictive behavior.