Consumption of Tobacco and Alcoholic Beverages Among Spanish Consumers

The joint selection and purchase of alcohol and tobacco in Spain is modeled using bivariate probit and endogenous switching regression analysis to account for the interaction between drinking and smoking. Different expenditure structures for tobacco and alcohol arise when one or both are consumed. Endogenous switching among structures exists because households are not randomly assigned. The results show that the correlation term of the selection equations and most correction terms for selfselectivity bias are statistically significant. The results also show that income and household demographic variables are important determinants of both selection and expenditures on tobacco and alcohol. INTRODUCTION Researchers from different fields have shown a long-standing interest in studies related to the consumption of alcohol and tobacco for two reasons. First, because of the social and health related problems associated with the abusive consumption of these commodities, and second, because of the need to evaluate the impact of different tax schemes on these goods in promoting government revenues, improving general welfare and controlling consumption. For instance, the Spanish government recently increased the tax rates on tobacco and alcoholic beverages once more, and is expecting increased revenues and reduction in consumption of these products. From this perspective, it is no wonder that the consumption of alcohol and the consumption of tobacco are often considered as two related matters by policy-makers, health officials and social scientists. In fact, there is strong empirical evidence that smoking and drinking are not independent activities (Jones [18]; Goel and Morey [10]; Jones and Mazzi [21]; Moore [29]; Su and Yen [33]). For over ten years, researchers have estimated the demands for tobacco and alcoholic beverages by using the double hurdle approach. This modeling approach allows differentiation between abstentions and corner solutions (those consumers who decide not to consume for certain levels of prices and income). The applications include, among others, Jones [17, 18, 19], Heien and Pompelli [13], Blaylock and Blisard [3, 4, 5], Fry and Pashardes [8], Garcia and Labeaga [9], Yen and Jensen [34], and Su and Yen [33]. However, standard double hurdle models do not allow for potential correlation between the decisions to smoke and drink. Only a few studies have accounted for the interaction between drinking and smoking. Blaylock and Blisard [3, 4, 5] used a double hurdle approach to study the socio-economic factors affecting the participation and expenditure decisions on alcohol Southwestern Economic Review 42 and tobacco independently. They implicitly recognized the interaction between the consumption of alcohol and tobacco by including a dummy variable (indicating whether or not the individual smokes) in the participation equations for alcohol and wine. Jones [18], Goel and Morey [10], and Jones and Mazzi [21] studied the interactions between the consumption of tobacco and alcohol using a demand systems approach to estimate budget share equations for different categories of alcoholic beverages and tobacco. Moore [29] also presented evidence of the complementarities between alcohol and tobacco consumption in his study of the effects of alcohol and tobacco taxes on mortality for the US. Lately, Su and Yen [33] have studied the US consumption of cigarette, beer and wine as a two-step decision process using a consistent two-step estimation procedure for a system of censored equations. All these previous studies ignored the fact that a typical sample of households includes: households that consume both tobacco and alcoholic beverages, households that only consume alcoholic beverages, households that only consume tobacco, and households that consume neither tobacco nor alcoholic beverages. Currently available studies on tobacco and alcohol demand generally ignore the importance of these subsamples. Given that these sub-samples are not entirely random draws from the population, a more complete model of tobacco and alcohol demand should take into account the joint determination of whether or not to consume tobacco and/or alcoholic beverages. And conditional on that decision, how much to spend on the purchase of tobacco and/or alcoholic beverages, should follow. Additional insights can be gained and more efficient parameter estimates obtained if we consider explicitly the potential correlation between the disturbance terms of the participation equations as well as the potential correlation between the disturbance terms of the participation and expenditure equations. Jones [18], and Fry and Pashardes [8] have pointed out the importance of distinguishing between “smokers” and “non-smokers” and “drinkers” and “non-drinkers” because they have different demand patterns or regimes. Miles [28] questioned the use of the double hurdle models for the estimation of tobacco demand in Spain. He argued that one of the underlying assumptions of these models (a relatively large number of corner solutions or “zero-smokers”) was not supported by the data. He used the Encuesta de Presupuestos Familiares 1990-91 (Spanish Expenditure Survey 1990-91), and found that the proportion of “smoker” households reporting zero expenditures on tobacco was extremely small and that almost all zeros were from “non-smokers”. Although it is true that zero expenditures on tobacco could also be due to infrequency of purchases, Lopez [25] found that this was a minor problem in the case of tobacco for Spain. Keen [24] and Blundell and Pashardes [6] also considered models where the zero expenditure on alcoholic beverages corresponded to purchase infrequency rather than corner solutions. We follow this approach based on adjusted data from Pena and Ruiz-Castillo [31]. Pena and RuizCastillo [31] used a Poisson model for frequency of bulk purchases to adjust the reported food expenditures (including tobacco and alcoholic beverages) and data from the Encuesta de Presupuestos Familiares 1990-91 to estimate the frequency of bulk purchases (Arevalo et al., [2]). Pena and Ruiz-Castillo’s “adjusted for bulk purchase” expenditures on tobacco and alcohol can be used to distinguish among these regimes because the remaining zeros could be considered as belonging to “non-smokers” and “non-drinkers”. Consumption of Tobacco and Alcoholic Beverages Among Spanish Consumers 43 All the above findings have important implications for modeling tobacco and alcohol demands in Spain. The joint decision processes are likely to be significant and the modeling should allow for the potential interaction between drinking and smoking. The analysis of expenditures on tobacco and alcohol should also allow for potential different demand regimes for (1) “smokers” and “drinkers”, (2) “drinkers” and “nonsmokers”, (3) “smokers” and “non-drinkers”, and (4) non-drinkers” and “non-smokers”. By modeling the four separate regimes, we allow the socioeconomic factors to have different effects on consumption for the four groups. In this research, we consider explicitly the potential correlation between the disturbance terms of the decision to purchase equations as well as the potential correlation between the disturbance terms of the decision to purchase and the expenditure equations. Specifically, we use Bivariate Probit Analysis and Endogenous Switching Regression techniques to model the interaction between the choice to consume tobacco and/or alcoholic beverages, and the expenditure on both tobacco and alcoholic beverages. In general, we find that, indeed, decisions to purchase tobacco and alcoholic beverages are related, and should be modeled as joint consumption decisions. We also find that determinants of size of expenditure on tobacco and alcoholic beverages affect these two consumption decisions differently. We present details of our findings in the Results and Discussion section; but first, the following section lays out the theoretical framework and empirical specifications of our analysis. THEORETICAL MODEL AND EMPIRICAL SPECIFICATION It is assumed that rational households seek to maximize their satisfaction given their different preferences and budget constraints. To achieve this, they first choose to consume one of the following: both alcohol and tobacco; alcohol only; tobacco only; or neither of them. In a second step, and conditional on these decisions, the households decide the level of expenditures on these commodities. In economic terms, the resulting combinations are the source of multiple economic structures for the demand functions of these goods – i.e., a household’s behavior is different when it consumes both tobacco and alcoholic beverages compared to when it only consumes tobacco or alcoholic beverages. In other words, there will exist different structures of household demand functions for these commodities when: (1) both tobacco and alcohol are consumed; (2) only alcohol is consumed; (3) only tobacco is consumed; and (4) neither of them is consumed. Seeing that decisions on belonging to one regime or the other are based on households’ optimizing behavior, households choose to belong to one regime or another. Under these conditions, there is endogenous switching between regimes because households are not randomly assigned to individual regimes (Maddala and Nelson [27]; Maddala [26]; Huffman [15]). Formally, every household is assumed to maximize its utility function