Price Uncertainty, Tax Policy, and Addiction: Evidence and Implications

38 Pages Posted: 20 Jul 2002 Last revised: 4 Apr 2015

See all articles by Mark Coppejans

Mark Coppejans

BlackRock, Inc; Barclays Global Investors

Holger Sieg

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2002

Abstract

Consumption of addictive goods is subject to habit formation. Forward-looking individuals must, therefore, be concerned about future prices when making current consumption decisions. We study prices for tobacco products based on a unique data set provided by the Bureau of Labor Statistics. Our empirical findings suggest that prices have been highly volatile during the past decade. Price uncertainty has a potentially large impact on the economic well-being of young individuals with relatively low levels of disposable income. We develop a model to study consumption of addictive substances under price uncertainty. Our results indicate that optimal decision rules of low income individuals can crucially depend on subjective beliefs about future prices and the length of the planning horizon. These results imply that tax policies are most effective in reducing teenage cigarette consumption if they credibly alter individuals' beliefs about future prices.

Suggested Citation

Coppejans, Mark T. and Sieg, Holger, Price Uncertainty, Tax Policy, and Addiction: Evidence and Implications (July 2002). NBER Working Paper No. w9073. Available at SSRN: https://ssrn.com/abstract=319749

Mark T. Coppejans

BlackRock, Inc ( email )

San Francisco, CA
United States

Barclays Global Investors ( email )

45 Fremont Street
San Francisco, CA 94105
United States

Holger Sieg (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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