Abstract:
Smoking is an expensive habit. Smoking households spend, on average, more than
$1000 annually on cigarettes. When a family member quits, in addition to the former smokers
improved long term health, families benefit because savings from reduced cigarette expenditures
can be allocated to other goods. For households in which some members continue to smoke,
smoking expenditures crowd-out other purchases, which may affect other household members,
as well as the smoker. We empirically analyze how expenditures on tobacco crowd out
consumption of other goods, estimating the patterns of substitution and complementarity
between tobacco products and other categories of household expenditure. We use the Consumer
Expenditure Survey data for the years 1995 to 2001, which we complement with regional price
data, and state cigarette prices. We estimate a consumer demand system that includes several
main expenditure categories (cigarettes, food, alcohol, housing, apparel, transportation, medical
care) and controls for socio-economic variables and other sources of observable heterogeneity.
Descriptive data indicate that, comparing smokers to non-smokers, smokers spend less on
housing. Results from the demand system indicate that as the price of cigarettes rises,
households increase the quantity of food purchased, and reduce the quantity of apparel
purchased.
