An empirical analysis of tobacco addiction in Italy

We estimate tobacco demand in Italy following the rational addiction framework. Two empirical tests are performed. The first uses a pseudo panel of data and follows the approach of Baltagi and Griffin. We obtain evidence of forward-looking behavior but implausible estimates of the discount rate. The second uses a time series of per capita tobacco expenditures. In this case the data support the theory. A simulation is also carried out to assess the effects of future permanent price changes on tobacco demand. The novelty here is that expected future consumption is estimated by ordinary least squares using past and future prices as regressors instead of taking actual consumption as is usually the case in empirical tests of the rational addiction model. Results show that announcements of future price changes may be effective in curbing tobacco demand.