Abstract
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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
See Goel (2008) for an alternate consideration that addresses price and non-price (corruption) differences.
Further, organized smugglers might be able to use scale economies of lower transportation costs to smuggle cigarettes to more distant locations.
G. Fields, “States Go to War on Cigarette Smuggling”, The Wall Street Journal, WSJ.com, July 20, 2009. https://www.wsj.com/articles/SB124804682785163691
The present study can be viewed as complementary to an earlier study by Goel (2008) where the spatial prevalence of corruption was considered along with the price. The presence of corruption (both own and neighboring) was found to not significantly impact U.S. cigarette demand.
Prieger and Kulick (2014) also note another spillover of illicit trade where stricter enforcement could lead to greater violence.
Incidentally, the start of our sample also corresponds with the time of the Master Settlement Tobacco Agreement that provided for substantial payments from tobacco companies to individual states (see Goel and Zhang (2013) and https://en.wikipedia.org/wiki/Tobacco_Master_Settlement_Agreement).
Following the extant literature, we take the available cigarette sales to denote cigarette consumption.
It has, however, to be kept in mind that not all underground activities can be precisely measured.
We do not have corresponding data on regional shadow economies on America’s foreign borders (i.e., Canada and Mexico) that would enable us to consider the spillovers to and from those jurisdictions (see Goel (2004b) for a study on U.S.-Canada cigarette smuggling, without accounting for the shadow economy).
The statistical significance of border prices in Panel B is relatively lower.
S. Solish, “Six Years after Ban, Smoking Returns to NYC’s Bars and Clubs”, ny.eater.com. November 19, 2009. https://ny.eater.com/2009/11/19/6752627/six-years-after-ban-smoking-returns-to-nycs-bars-and-clubs
K. Murakami, “Smokers Find refuge in Secret Nicotine Dens”, www.seattlepi.com, May 30, 2006. https://www.seattlepi.com/local/article/Smokers-find-refuge-in-secret-nicotine-dens-1204914.php
References
Advisory Commission on Intergovernmental Relations (ACIR) (1985) Cigarette tax evasion: a second look. U.S. Advisory Commission on Intergovernmental Relations, Washington, DC
Apergis N, Goel RK, Payne JE (2014) Dynamics of U.S. state cigarette consumption: evidence from panel error correction modeling. Atl Econ J 42(1):3–20
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297
Baltagi BH, Levin D (1992) Cigarette taxation: raising revenues and reducing consumption. Struct Chang Econ Dyn 3(2):321–335
Baltagi BH, Levin D (1986) Estimating dynamic demand for cigarettes using panel data: the effects of bootlegging, taxation and advertising reconsidered. Rev Econ Stat 68(1):148–155
Bishop JM (2018) Does cigarette smuggling prop up smoking rates? Am J Health Econ 4(1):80–104
Buehn A, Schneider F (2012) Corruption and the shadow economy: like oil and vinegar, like water and fire? Int Tax Public Financ 19(1):172–194
Calderoni F (2014) A new method for estimating the illicit cigarette market at the subnational level and its application to Italy. Global Crime 15(1–2):51–76
Cebula RJ, Foley M, Houmes R (2014) Empirical analysis of the impact of cigarette excise taxes on cigarette consumption: estimates from recent state-level data. J Econ Financ 38(1):164–180
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 1539–1627
Czart C, Pacula RL, Chaloupka FJ, Wechsler H (2001) The impact of prices and control policies on cigarette smoking among college students. Contemp Econ Policy 19(2):135–149
Gallet CA, List JA (2003) Cigarette demand: a meta-analysis of elasticities. Health Econ 12:821–835
Goel RK (2004a) New developments in tobacco research: an introduction. J Econ Financ 28(3):379–381
Goel RK (2004b) Cigarette demand in Canada and U.S.-Canadian cigarette smuggling. Appl Econ Lett 11(9):537–540
Goel RK (2008) Cigarette smuggling: price versus non-price incentives. Appl Econ Lett 15(8):587–592
Goel RK (2012) Effects of generic cigarettes on U.S. cigarette demand and smuggling. Econ Lett 115(1):114–117
Goel RK, Nelson MA (2007) The Master Settlement Agreement and cigarette tax policy. J Policy Model 29(3):431-438
Goel RK, Nelson MA (2008) Global efforts to combat smoking. Ashgate Publishing, Aldershot
Goel RK, Saunoris JW (2016) Casting a long shadow? Cross-border spillovers of shadow economy across American states. Public Finance Rev 44(5):610–634
Goel RK, Zhang X (2013) Gender dynamics and smoking prevalence in Japan. J Econ Financ 37(4):622-636
Joossens L, Merriman D, Ross H, Raw M (2010) The impact of eliminating the global illicit cigarette trade on health and revenue. Addiction 105(9):1640–1649
Joossens L, Raw M (1995) Smuggling and cross border shopping of tobacco in Europe. Br Med J 310:1393–1397
Joossens L, Raw M (2012) From cigarette smuggling to illicit tobacco trade. Tob Control 21(2):230–234
Orzechowski, Walker (2014) The tax burden on tobacco, historical compilation, vol 49. Arlington, Virginia
Prieger JE, Kulick J (2014) Unintended consequences of enforcement in illicit markets. Econ Lett 125(2):295–297
Saffer H, Dench D, Dave D, Grossman M (2018) E-cigarettes and adult smoking. NBER working paper no. 24212
Schneider F, Enste DH (2000) Shadow economies: size, causes, and consequences. J Econ Lit 38(1):77–114
Schneider F, Enste DH (2013) The shadow economy: an international survey. Cambridge University Press, Cambridge
Sung H-Y, Hu T-W, Keeler TE (1994) Cigarette taxation and demand: an empirical model. Contemp Econ Policy 12(3):91–100
Thursby JG, Thursby MC (2000) Interstate cigarette bootlegging: extent, revenue losses, and effects of federal intervention. Natl Tax J 53(1):59–78
U.S. Bureau of Census (various years) Statistical Abstract of the United States, Washington, DC
Wiseman T (2013) US shadow economies: a state-level study. Constit Polit Econ 24(4):310–335
Yürekli A, Sayginsoy Ö (2010) Worldwide organized cigarette smuggling: an empirical analysis. Appl Econ 42(5):545–561
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Goel, R.K., Saunoris, J.W. Cigarette smuggling: using the shadow economy or creating its own?. J Econ Finan 43, 582–593 (2019). https://doi.org/10.1007/s12197-018-9454-x
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-018-9454-x