Relative income concerns and smoking behaviour: The role of unobserved heterogeneity

Status or relative concerns (as in the idiom 'keeping up with the Joneses') can lead to negative feelings such as stress and anxiety. One key question is whether these concerns relate to daily smoking behaviour. The conjecture is that status concerns and the accompanying stress and anxiety might be associated with a higher likelihood of smoking and a higher number of cigarettes smoked, generating a higher instant physical reward and reducing the stress and anxiety. The literature aiming to identify this relationship focuses mostly on a single cross section of individuals, ignoring potential differences in unobserved characteristics of smokers and non-smokers (e.g., genetic factors, personality differences, parental smoking during childhood). This paper investigates the role of unobserved individual characteristics on this relationship, which has not been done in previous studies. Using a long panel data of smoking information in Germany and a variety of panel data model specifications, we show that there is no statistically significant association between relative income concerns and the likelihood of smoking or the number of cigarettes smoked among the overall population. We find a positive and significant relationship only among people who smoked at least one cigarette in the past. A 10% appreciation in the income of comparable other individuals relates to about 3.5 more cigarettes per month among these people. Importantly, failing to allow for the unobserved influences of smoking leads to three times larger estimates than when using models with unobserved factors correlating to the income and smoking behaviour. The results are robust with respect to alternative assumptions and specifications where we use different functional forms of unobserved heterogeneity, definitions of relative concerns, incomes, and reference groups.