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The demand for tobacco in post-unification Italy

Cliometrica volume 8, pages 145–171 (2014)Cite this article

Abstract

This paper studies the demand for tobacco products in post-unification Italy. We construct a very detailed panel data set of yearly consumption in the 69 Italian provinces from 1871 to 1913 and use it to estimate the demand for tobacco products. We find support for the Becker and Murphy (J Polit Econ 96:675–700, 1988) rational addiction model. We also find that, in the period considered, tobacco was a normal good in Italy: aggregate tobacco consumption increased with income. Subsequently, we consider separately the four types of products which aggregate tobacco comprises (fine-cut tobacco, snuff, cigars, and cigarettes), and tentatively suggest that habit formation was a stronger factor on the persistence of consumption than physical addiction. The paper ends by showing that the introduction of the Bonsack machine in the early 1890s did not coincide with changes in the structure of the demand for tobacco, suggesting cost-driven technological change.

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Notes

  1. After sporadic and often short-lived attempts to ban or reduce tobacco consumption (Sloan 2002, p. 149; Alston et al. 2002), public health campaigning grew steadily in intensity after World War II, following the first influential studies of the health effects of smoking such as the 1953 American Cancer Society and British Medical Research Council report, and the 1964 US Surgeon General’s Report. Early analysis of these campaigns have suggested potentially unexpected effects (eg. Sumner 1971; Atkinson and Skegg 1973; Warner 1977; Schneider et al. 1981; Engleman 1987, for a survey). This might be due to the compounding of addiction and the cumulative effect of staggered shocks and each petering out with time. An example of the more recent evaluations of the effects of specific policies is Frieden et al. (2005).

  2. A survey is Chaloupka and Warner (2000); examples of more recent work are Escario and Molina (2001), DeCicca et al. (2002), Farrelly et al. (2005), Lance et al. (2004) and Adda and Cornaglia (2006).

  3. We do have statistical reconstructions of annual national income, and perhaps more importantly, we also have estimates of regional GDP in some years. Encouragingly, both these measures correlate strongly with the corresponding measure obtained from our proxy.

  4. Whether mechanisation of tobacco was an essential factor in Duke’s business success (Chandler 1977, pp. 382–391), or whether it was achieved by successful monopoly predatory practices (Hannah 2006) is tangential to the topic of this paper.

  5. An extensive survey of the rational addiction model is included in Chaloupka and Warner (2000). Critical appraisals of the model range from the view that serial correlation (Auld and Grootendorst 2004) and time inconsistent preferences (Gruber and Köszegi 2001) are indistinguishable from rational addiction. A more sweeping criticism is Rogeberg (2004). As Table 2 shows, the alternative framework of myopic addiction yields estimations of the price, income and education elasticities, which are similar to those we derive with the rational addiction model.

  6. This is a departure from the earlier literature which begun with Becker et al. (1994), and is in line with several of more recent contributions (e.g. Gospodinov and Irvine 2005).

  7. An exhaustive historical long-term account of the rise and fall of the State monopoly in Italy from 1861 to 1997 is Vetritto 2005, and a detailed description of the sources on tobacco used here is Ciccarelli (2012). After Manera’s early work (1963), tobacco consumption in Italy has been analysed, for the second half of the twentieth century by Jones and Giannoni-Mazzi (1996), Tiezzi (2005), Aristei and Pieroni (2008), and Pierani and Tiezzi (2009) among others.

  8. We note an accounting change in the financial year 1884. Available data for the years 1871–1883 run from January to December; subsequently, there is financial data for the January–June semester of 1884, and, from then on, the reporting period shifts to July–June. The customary manner (see for instance Fenoaltea 1986, p. 8) to deal with this quirk is to split in half the values of each reported year and construct the value for the calendar year by adding up the two halves obtained from two subsequent reported years: so, for example, the values for year 1900 are obtained by adding half of the year 1899 and half of the year 1900.

  9. Data for Sicily, which had seven provinces, are missing for the years before 1877. While of course Sicilians did smoke in those years, their purchases were not recorded by the Regìa, as the monopoly was extended to Sicily only in 1877. To sum up, our unbalanced panel includes 62 provinces in the years 1871–1876 and all 69 Italian provinces in the years 1877–1913.

  10. Italian consumers in the period considered could choose around 100 different tobacco products. Quantities and prices for each of all these products are available up to the fiscal year 1888–1889, 4 years after the expiration of the contract, in 1884: subsequently, the monopoly was fully managed by the State. Ciccarelli et al. (2012) use this detailed information to investigate the profit maximising behaviour of the Regìa. After 1889, the data set contains the complete series, for each province, of the total sales, in weight and in values, of the four broad groups of tobacco products: less detailed, but adequate for our purpose.

  11. In the words of Agostino Magliani, the Finance Minister himself: “consumers, with advanced warning of a price increase, would detract enormous amounts of tobacco from the new tariff” (Atti Parlamentari 1878, p. 2).

  12. For the non-census years, we do not use the annual population figures reported in the main sources on tobacco, as they appear seriously flawed, with large unjustified annual changes. A linear interpolation of the figures for the census years (1871, 1881, 1901 and 1911) is preferable.

  13. The “official” cost of living index is given in Istat (1958, p. 172). This has two drawbacks. The first is that it includes the price of bread, but not of flour, and thus neglects inferior grains. The second is that it assigns (or it appears to assign, as full documentation is not available) very low weights to fundamental basic goods, such as bread. The Istat index may thus be appropriate for the better-off, but not for a rural economy, such as Italy at the time. See Fenoaltea (2002) pp. 31–33, for further details of the index he constructs.

  14. We note that Mortara (1913) also uses the business tax to construct his measure of regional development index.

  15. Clough and Livi (1956) and Eckaus (1961) among the earliest to point it out; Felice (2011), p. 931 and Brunetti et al. (2011), p. 223, and Ciccarelli and Fenoaltea (2013) give a summary of the more recent debate.

  16. Felice (2012) notes that primary and secondary enrolment rates at the regional level also point to high education inequality across the country.

  17. An intuitive explanation of the problem is as follows. Two-stage least squares (2SLS) are members of the GMM family. In a standard 2SLS framework, if the number of instruments equals the number of observations, then the regression run in the first stage returns, by construction, an R 2 equal to 1. As a consequence, the second-stage regression returns the very same (biased) OLS estimates that called for the 2SLS approach in the first place. See Roodman (2009), pp. 148–149 for the technical details.

  18. To check that the instruments we use are appropriate, we executed the standard Sargan overidentification test (whose statistics is distributed as a χ2 with one degree of freedom). The null is that the overidentification restrictions are valid. We fail to reject it (i.e. we obtain high p values), and this allows us to conclude that our instruments set is appropriate.

  19. The Sargan test for overidentification does not reject the null, suggesting valid instruments. The Arellano–Bond tests for first- and second-order serial correlation yield the expected results: the null for the absence of first-order serial correlation is rejected, and the null for the presence of second-order serial correlation is rejected.

  20. We do not have tests for the products available in Italy at the time, but current medical research (Richter and Spierto 2003; Richter et al. 2008, or the earlier survey by Benowitz 1988) suggests that smokeless tobacco is as likely to determine the addiction to nicotine (and to other substances) as other currently used forms of smoking tobacco.

  21. A hypothetical example illustrates this point. Imagine that we are studying smokers’ behaviour in a European country. We think that smokers are of two types: those who are addicted to smoking, and the poseurs, who smoke to project an image; the better to advice policy makers on how to design an anti-smoking campaign, we would like to know the relative size of the two groups of smokers. To continue our example, imagine that the “poseurs” are in turn further divided into two groups, those who like to project the tough image of a rough American cowboy, associated with brand M, sold in a red and white package, and those who wish to be seen as French type intellectuals, which they think they can by smoking brand G, rolled in yellow paper and sold in a light blue package. The addicted smokers have no preference for a brand: they choose depending on prices; their current and future consumption is affected by past consumption, of whichever brand they happened to have consumed in the past and expect to consume in the future. If all tobacco consumers were addicted smokers, then the aggregate demand for each brand would exhibit strong substitutability between brands (the coefficient for brand M would have approximately the same absolute value and the opposite sign as the coefficient for brand G), and the current consumption of each brand would be similarly affected by past and future consumption of the two brands (the coefficients for past and future consumption of brand M would have approximately the same values as the corresponding coefficients for brand G).

    Not so for image conscious smokers. The cowboy type finds brand G useless to project his desired image and won’t be swayed into buying brand G by a price reduction. Similarly for brand M, French intellectual types would not touch it with a barge pole, no matter how cheap it is. The price substitution coefficient is 0 for these types. Also, 0 is the addiction coefficient for the other brand. To sustain their image, they need the specific brand associated with that image to do so, so an increase in past consumption of the “wrong” brand (for whatever reason it happened) has no effect on the current consumption of their desired brand: econometrically, both the cross-price elasticity and the “other products past and future consumption” elasticities would give estimates close to 0.

    So, if we found that the consumption of brands G (brand F) is increased little by a price increase in brand F (in brand G) and is increased little by an increase in the past or future consumption of brand F (of brand G), where little means relative to the own effects, then we would conclude that most consumers are poseurs: they care about the brand, not the smoking. Vice versa, large cross-price substitutability coefficients and large cross-brand addiction coefficients suggest most consumers are physically addicted.

  22. Not the total amount used in (2), because that includes the consumption of the product being considered.

  23. There is a small recent literature studying the interaction of two or more addictive products (Andersson et al. 2006; Lee 2007; Pierani and Tiezzi 2009). With separate goods, such as alcohol and smoking, the cross-price elasticity coefficient has the same interpretation as that between, say snuff and cut tobacco; but, clearly, the question of the disentangling the source of addiction, whether physical or habit, does not make sense in the context of products like alcohol and tobacco, given the different substance considered to cause addiction. A recent comparative study for a number of European countries does estimate cross-price elasticities, for the countries which have data for more than one product (Netherlands, Finland, Sweden), but does not separate past and future consumption into its components (Nguyen et al. 2012).

  24. Panel co-integration tests (with the algorithm proposed by Westerlund 2007) confirm that prices and quantities of the three product groups move in the same direction in the various provinces.

  25. The qualitative nature of the results does not change if cigars and cigarettes are aggregated into a single product group.

  26. The Arellano–Bond tests for first- and second-order serial correlation performed after the GMM estimation yield the expected results and do suggest a sound econometric strategy. On the other hand, the result of the Hansen test for appropriateness of the set of instruments is less convincing than for the regression for the total quantity.

  27. A simple time trend regression gives a national growth rate of 13 % per year, with a 0.984 R 2. By comparison, the rest of the tobacco consumption declined at a rate of about 0.2 % per year.

  28. In one account, demand changed exogenously in the United States at the time, which stimulated mechanisation. There, in contrast to Europe in general and Italy in particular, chewing was prevalent in the first part of the nineteenth century, but “the rapid urbanisation of the late nineteenth century [changed the structure of demand and] gave cigarettes advantages over [...] chewing tobacco, [as] urban standards of decorum discouraged spitting, a necessary adjunct to tobacco chewing”(Tate, p. 17).

  29. And indeed, their desirability aside, the liberal government of the time maintained a strong scepticism about the effectiveness of such campaigns, Prime Minister Giolitti refused to contemplate banning young people from smoking on the grounds that it “would have the immediate effect to make them all smoke, just to enjoy breaking the law with little risk of getting caught.” (Atti Parlamentari 1907, p. 11800).

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Acknowledgments

We would like to thank Brian A’Hearn, Stefano Fenoaltea, Jesse Matheson, Alessandro Nuvolari, Pierpaolo Pierani, Ludovic Renou, James Rockey, Silvia Tiezzi, Chris Wallace, Jacob Weisdorf, and the audience at the April 2012 FRESH meeting in Pisa and at the Banca d’Italia for precious suggestions.

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Authors and Affiliations

  1. Dipartimento di Economia e Finanza, Università di Roma “Tor Vergata”, Via Columbia 2, 00133, Rome, Italy

    Carlo Ciccarelli & Gianni De Fraja

  2. Nottingham School of Economics, Sir Clive Granger Building, University Park, Nottingham, NG7 2RD, UK

    Gianni De Fraja

  3. C.E.P.R, 90-98 Goswell Street, London, EC1V 7DB, UK

    Gianni De Fraja

Authors
  1. Carlo Ciccarelli
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Correspondence to Carlo Ciccarelli.

Appendix

Appendix

This appendix documents the sources used for the statistical reconstruction of the business tax variable used in this paper to proxy GDP at the provincial level for the years 1871–1913. The appendix also lists the sources used to estimate the percentage of illiterates over total population. Ciccarelli (2012) contains an exhaustive account on the sources for the remaining variables (tobacco, cost of living index and population) used in this paper.

1.1 Business tax

The original sources include under the heading “Business Taxes” a wide set of different elements. For reasons indicated in the main text, the business tax variable used in the empirical part of the paper was obtained by selecting three elements, namely the “Tassa di Bollo”, the “Tassa di registro” and the “Tassa in Surrogazione del Bollo e del Registro” (that in the years 1871–1883 appears in the sources under the heading “Tassa sulle Società”).

The data for the initial period (1871–1883) are from Ministero delle finanze, Annuario del Regno d’Italia, ad annum (the data for the year 1875 are, for instance, taken from pp. 124–131 of Annuario del Regno d’Italia, 1876, sum of the provincial figures reported in the three columns with heading “Società”, “Registro”, and “Bollo”). The data for the first semester of 1884 and for the fiscal years 1884–1885 to 1897–1898 are from Ministero delle finanze, Relazione sulla amministrazione del demanio e delle tasse sugli affari per gli esercizi finanziari, ad annum (the data for the year 1897–1898 are, for instance, taken from Relazione sulla amministrazione del demanio e delle tasse sugli affari per gli esercizi finanziari, 1897–1898, pp. 84–87, sum of the figures reported in the three columns with heading “Tasse di registro”, “Tasse di bollo”, and “Tasse in surrogazione del bollo e del registro”). The data for the fiscal years 1898–1899 to 1913-14 are finally from Ministero delle finanze, Bollettino di statistica e legislazione comparata, ad annum (the data for the year 1904–1905 are, for instance, taken from Bollettino di statistica e legislazione comparata, 1904–1905, pp. 1086–1089, sum of the figures reported in the three columns with heading “Tasse di registro”, “Tasse di bollo”, and “Tasse in surrogazione del bollo e del registro”).

1.2 Illiteracy

The data on illiterates for 1871 are from Ministero di Agricoltura, Industria e Commercio (1874–76), vol. 2, Introduzione, pp. B-I; those for 1881 are from Ministero di Agricoltura, Industria e Commercio (1883–85), vol. 2, pp. 587–598; figures for 1901 are from Ministero di Agricoltura, Industria e Commercio (1902–04), vol. 2, pp. 268–319; figures for 1911 are finally from Ministero di Agricoltura, Industria e Commercio (1914–16), vol. 2; pp. 555–620. The 1871–1913 time series at the provincial level were then obtained by linear interpolation, separately by province, of the 1871, 1881, 1901 and 1911 benchmark data.

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Ciccarelli, C., De Fraja, G. The demand for tobacco in post-unification Italy. Cliometrica 8, 145–171 (2014). https://doi.org/10.1007/s11698-013-0097-z

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