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Tobacco and Alcohol: Complements or Substitutes? A Structural Model Approach

40 Pages Posted: 29 Jan 2008  

Harald Tauchmann

Rhine-Westphalia Institute for Economic Research (RWI-Essen)

Silja Göhlmann

Rhine-Westphalia Institute for Economic Research (RWI-Essen)

Till Requate

University of Kiel - Department of Economics

Christoph M. Schmidt

RWI - Leibniz-Insitut für Wirtschaftsforschung (RWI Essen); Ruhr-Universität Bochum (RUB); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)

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Date Written: December 2007

Abstract

The question of whether two drugs - namely alcohol and tobacco - are used as complements or substitutes is of crucial interest if side-effects of anti-smoking policies are considered. Numerous papers have empirically addressed this issue by estimating demand systems for alcohol and tobacco and subsequently calculating cross-price effects. However, this traditional approach often is seriously hampered by insufficient price-variation observed in survey data. We therefore suggest an alternative instrumental variables approach that statistically mimics an experimental study and does not rely on prices as explanatory variables.This approach is applied to German survey data. Our estimation results suggest that a reduction in tobacco consumption results in a moderate reduction in alcohol consumption. It is shown theoretically that this implies that alcohol and tobacco are complements. Hence, we conclude that successful anti-smoking policies will not result in the unintended side-effect of an increased (ab)use of alcohol.

Keywords: Complements or substitutes, interdependence in consumption, tobacco and alcohol, insufficient price-variation,instrumental variables approach

JEL Classification: C31, D12, I12

Suggested Citation

Tauchmann, Harald and Göhlmann, Silja and Requate, Till and Schmidt, Christoph M., Tobacco and Alcohol: Complements or Substitutes? A Structural Model Approach (December 2007). Ruhr Economic Paper No. 34. Available at SSRN: https://ssrn.com/abstract=1088077 or http://dx.doi.org/10.2139/ssrn.1088077

Harald Tauchmann (Contact Author)

Rhine-Westphalia Institute for Economic Research (RWI-Essen) ( email )

Hohenzollernstr. 1-3
45128 Essen
Germany

Silja Göhlmann

Rhine-Westphalia Institute for Economic Research (RWI-Essen) ( email )

45128 Essen
Germany

Till Requate

University of Kiel - Department of Economics ( email )

Olshausenstrasse 40
24098 Kiel, 24098
Germany
+49 431 880-4424 (Phone)
+49 431 880-1618 (Fax)

Christoph M. Schmidt

RWI - Leibniz-Insitut für Wirtschaftsforschung (RWI Essen) ( email )

Hohenzollernstraße 1-3
Essen, 45128
Germany
++49 201 8149-227 (Phone)
++49 201 8149-236 (Fax)

Ruhr-Universität Bochum (RUB)

GC 2/150
Universitätsstr. 150
D-44780 Bochum
Germany

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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