Are smokers rational addicts? Empirical evidence from the Indonesian Family Life Survey

BACKGROUND: Indonesia is one of the largest consumers of tobacco in the world, however there has been little work done on the economics addiction of tobacco. This study provides an empirical test of a rational addiction (henceforth RA) hypothesis of cigarette demand in Indonesia. METHODS: Four estimators (OLS, 2SLS, GMM, and System-GMM) were explored to test the RA hypothesis. The author adopted several diagnostics tests to select the best estimator to overcome econometric problems faced in presence of the past and future cigarette consumption (suspected endogenous variables). A short-run and long-run price elasticities of cigarettes demand was then calculated. The model was applied to individuals pooled data derived from three-waves a panel of the Indonesian Family Life Survey spanning the period 1993-2000. RESULTS: The past cigarette consumption coefficients turned out to be a positive with a p-value < 1%, implying that cigarettes indeed an addictive goods. The rational addiction hypothesis was rejected in favour of myopic ones. The short-run cigarette price elasticity for male and female was estimated to be-0.38 and -0.57, respectively, and the long-run one was -0.4 and -3.85, respectively. CONCLUSIONS: Health policymakers should redesign current public health campaign against cigarette smoking in the country. Given the demand for cigarettes to be more prices sensitive for the long run (and female) than the short run (and male), an increase in the price of cigarettes could lead to a significant fall in cigarette consumption in the long run rather than as a constant source of government revenue.