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The effects of increases in cigarette prices on cigarette consumption among smokers after the Master Settlement Agreement

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Abstract

This paper examines the impact of the large increases in cigarette prices after the Master Settlement Agreement on cigarette consumption among smokers by estimating a dynamic panel data model. I use system generalized method of moments estimator with fixed effects to address the unobserved heterogeneity and the initial conditions problem. I find that older smokers (aged 51 and older) are virtually unresponsive to price changes, and younger smokers (aged 50 and younger) are more price sensitive; women smokers might be more price responsive; and the overall estimated price elasticity for the full sample of smokers is −0.26. In addition, smoke-free air laws do not show significant effects.

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Notes

  1. Source: Center for Disease Control and Prevention (CDC). “Tobacco Use: Targeting the Nation’s Leading Killer at a Glance 2011.” http://www.cdc.gov/chronicdisease/resources/publications/AAG/osh.htm. Accessed on April 21, 2014.

  2. Chaloupka and Grossman (1996).

  3. See Orzechowski and Walker (2009).

  4. Adjusted to 1999 dollars.

  5. In this paper, smokers are defined as the individuals who report smoking at least one cigarette per day on average. Because non-smokers should not be affected by increases in cigarette prices, they are excluded in this study.

  6. See Chaloupka and Warner (2000).

  7. Boltagi and Levin (1986) is a study that estimates dynamic demand for cigarettes using state-level panel data. Glied (2002) uses individual-level panel data from the NLSY, but does not incorporate dynamics.

  8. See Becker et al. (1994) and Picone et al. (2004).

  9. The dependent variable does not include zeros because smokers smoke at least one cigarette per day on average.

  10. See Orzechowski and Walker (2009).

  11. See Blundell and Bond (1998), Chamberlain (1984) and Stewart (2007).

  12. See Nickell (1981).

  13. See Bond (2002).

  14. These are used as IV style instruments in addition to the GMM style instruments. See Roodman (2006).

  15. Z di is the instrument matrix for the differenced equation for each individual; Z li is the instrument matrix for the level equation for each individual; Z si is the instrument matrix for the system of equations for each individual.

  16. Z s , ΔU i and U i are stacked matrices across individuals.

  17. Balanced panels are used.

  18. See Arellano and Bover (1995). Also see Bond and Windmeijer (2002).

  19. Windmeijer finite-sample corrected standard errors are reported. See Windmeijer (2005).

  20. Although the validity of this finding is weakened by the failure in the autocorrelation test, the Difference-in-Hansen test suggests that the instruments are exogenous.

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  1. Misericordia University, Dallas, PA, 18612, USA

    Zhen Ma

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Ma, Z. The effects of increases in cigarette prices on cigarette consumption among smokers after the Master Settlement Agreement. Rev Econ Household 15, 1177–1190 (2017). https://doi.org/10.1007/s11150-015-9290-0

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