Cigarette smuggling: using the shadow economy or creating its own?
- 144 Downloads
Cigarette smuggling undermines policymakers’ efforts to curb smoking while also leading to tax revenue leakages. Policymakers around the world are trying to obtain a better understanding of how to combat cigarette smuggling. This paper adds to the literature on cigarette demand and related smuggling by considering the cross-border influences of both the price differentials and the shadow economy. While price/tax differentials induce both casual and organized smuggling, the presence of the shadow economy facilitates smuggling and opens up possibilities for arbitrage in smuggled goods. Using data across U.S. states for the years 1997–2008, results show that border price effects are positive and statistically significant, and the average shadow economy in bordering states facilitates smuggling, with own shadow economy sometimes showing signs of facilitating intra- and cross-border smuggling. The other findings regarding the negative own-price elasticities and habit persistence for smoking are in line with the larger literature.
KeywordsCigarettes Smoking Demand Smuggling Elasticity Shadow economy United States
JEL ClassificationD12 H71 K42 L66
- Advisory Commission on Intergovernmental Relations (ACIR) (1985) Cigarette tax evasion: a second look. U.S. Advisory Commission on Intergovernmental Relations, Washington, DCGoogle Scholar
- Chaloupka FJ, Warner KE (2000) The economics of smoking. In: Culyer AJ, Newhouse JP (eds) Handbook of health economics, vol 1. North-Holland, Amsterdam, pp 1539–1627Google Scholar
- Goel RK, Nelson MA (2008) Global efforts to combat smoking. Ashgate Publishing, AldershotGoogle Scholar
- Goel RK, Zhang X (2013) Gender dynamics and smoking prevalence in Japan. J Econ Financ 37(4):622-636Google Scholar
- Orzechowski, Walker (2014) The tax burden on tobacco, historical compilation, vol 49. Arlington, VirginiaGoogle Scholar
- Saffer H, Dench D, Dave D, Grossman M (2018) E-cigarettes and adult smoking. NBER working paper no. 24212Google Scholar
- U.S. Bureau of Census (various years) Statistical Abstract of the United States, Washington, DCGoogle Scholar