The econometrics of rational addiction

Baltagi, Badi H.; & Griffin, James M. (2001). The econometrics of rational addiction. Journal of Business and Economic Statistics, 19(4), 449-454.

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Baltagi, Badi H.; & Griffin, James M. (2001). The econometrics of rational addiction. Journal of Business and Economic Statistics, 19(4), 449-454.

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Abstract:

This article reexamines the econometric estimation of rational-addiction models considered by Becker, Grossman, and Murphy (BGM) for cigarette consumption. The rational-addiction model poses a number of additional econometric difficulties including endogeneity due to the presence of leads and lags of the dependent variable and serial correlation in the disturbances. BGM considered a fixed-effects two-stage least squares (2SLS) estimator. It is well known that this estimator is biased for fixed T. This article suggests a forward-filter first-difference 2SLS estimator and a generalized method of moments type of estimator that are consistent. Using a panel dataset of 46 states over the period 1963–1992, this article estimates the rational-addiction model for cigarettes. Our empirical results are both supportive of the rational-addiction hypothesis and more plausible than BGM's original results.

URL:

http://dx.doi.org/10.1198/07350010152596691

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Reference Type:
JOUR

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Series Title:

Author(s):
Baltagi, Badi H.
Griffin, James M.

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Year Published:
2001

Date Published:

Journal Name:
Journal of Business and Economic Statistics

Volume Number:
19

Issue Number:
4

Start Page Number:
449-454

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ISSN/ISBN:
0735-0015

DOI:
10.1198/07350010152596691

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Reference ID:
725

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The econometrics of rational addiction