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Do young adults substitute cigarettes for alcohol? Learning from the master settlement agreement

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Abstract

Although real alcohol prices have plummeted over the last two decades, cigarette prices have increased substantially, especially after the Master Settlement Agreement (MSA) in 1998. I study the effect of increases in cigarette prices following the MSA on alcohol consumption among 18- to 24-year olds to determine the economic relationship between cigarettes and alcohol among young adults. I perform analyses at both the conditional mean and quantiles and find that increases in cigarette prices reduce drinking participation among young adults at the extensive margin. However, conditional upon one’s decision to drink, higher cigarette prices increase alcohol consumption. Such a pattern of substitution is concentrated between the 40th and 50th conditional quantiles. The results suggest that caution should be exercised when considering cigarettes and alcohol as complements.

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Notes

  1. A reason for the states being disinclined to raise alcohol excise taxes may be due to the influence of lobbyists.

  2. Parents Against Smoking was launched in 1990. Also, domestic airline flights of less than 6 h duration banned smoking. Several states started passing smoking bans in restaurants and/or workplaces. The Synar Amendment, establishing a minimum age for tobacco sales, passed in 1992, and went into effect in 1996. The Master Settlement Agreement was signed in November 1998.

  3. Log transformation is used for three main reasons: (1) It reduces the skewness of the distribution among drinkers, although it does not completely eradicate it; (2) Performing a log transformation mitigates the heteroskedasticity present on the conditional distribution of the outcome variable; and (3) Past literature, starting with Lederman (1956), suggests that alcohol consumption follows a log normal distribution.

  4. A detailed discussion is provided in Sect. 6, which discusses potential threats regarding identification.

  5. Source: http://www.nytimes.com/1998/11/24/us/cigarette-makers-announce-large-price-rise.html.

  6. States that changed beer taxes during the timeframe of this study are: Alaska (2002), Hawaii (1998), Illinois (1999), Nebraska (2003), New York (1999, 2001, 2003), Utah (2003), and Washington (1997).

  7. Source: http://www.gallup.com/poll/174074/beer-americans-adult-beverage-choice-year.aspx.

  8. Wine is sold privately in all states including the monopoly states with the exception of Pennsylvania, New Hampshire, and Utah. In specifications that include wine taxes, I drop these three states.

  9. Also, the BRFSS uses a limit of smoking 100 cigarettes to categorize respondents into categories of never-smokers, ever-smokers, current-smokers, and former-smokers. These categories closely resemble the definitions provided by the World Health Organization. For example, never-smokers are defined as individuals who reported not smoking ≥100 cigarettes in their lifetime and ever-smokers are defined as individuals who reported smoking ≥100 cigarettes in their lifetime. To test whether the main results are sensitive to a different categorization, I focus only on current smokers and exclude former smokers (who reported having smoked ≥100 cigarettes in their lifetime but none in the past 30 days) from the main sample. The results from such analyses are discussed in the Robustness Check section.

  10. Source: http://www.surgeongeneral.gov/library/reports/50-years-of-progress/#fullreport4.

  11. The results are not shown but are available upon request.

  12. The log of the monthly number of drinks can be translated back to drinks consumed per month by using the inverse transformation. Such a direct transformation is not feasible for the conditional mean (see Cameron and Trivedi 2009).

  13. Due to such an absence of data, I categorize individuals who reported smoking on a daily basis as relatively heavy smokers; whereas, non-daily smokers represent light smokers. Although this cut-off provides an improper distinction between heavy and light smokers, daily smokers tend to smoke more cigarettes per day compared to non-daily smokers. Increases in cigarette prices are associated with a reduction in the drinking participation among both groups. However, higher cigarette prices are associated with increases in monthly alcohol consumption. The results are not shown but are available upon request.

  14. The results are not shown but are available upon request.

  15. The state-level data of alcohol consumption for the years 1990–2008 is obtained from the National Institute on Alcohol Abuse and Alcoholism database.

  16. It has to be noted that the calculation of per capita beer consumption does not restrict the age group, whereas the focus of this study is 18- to 24-year olds.

  17. If the reported number of drinks by heavy drinkers is less than the actual number of drinks imbibed following an increase in cigarette prices, the coefficients on cigarette prices for the heavy drinkers will be biased downwards. A measurement error can also be introduced when the state average of cigarette prices is used instead of the actual expenditure of cigarettes incurred by an individual. In this case, the measurement issue in cigarette prices will increase the signal-to-noise ratio, which will bias the cross-price estimates towards zero. The actual cigarette price faced by an individual can be written as \(cig price_{its} = cigprice_{ts} + u_{its} .\) Here, the cigarette price faced by an individual (\(cig price_{its} )\) is the sum of the mean of the average state cigarette prices at time t with some error term u its.

  18. Delaware, Maine, and Pennsylvania repealed their Sunday sales ban laws in 2003; whereas Rhode Island and Virginia repealed theirs in 2004. Arkansas and Kansas authorized a local option in years 1999 and 2005, respectively. A local option is adapted by the local government in a state and is less restrictive than the state ban. States with authorized local options are coded as “1.”.

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Acknowledgments

I would like to thank David Jacho Chavez, Andrew Francis-Tan, Sara Markowitz, and Hugo Mialon for their extremely helpful comments and suggestions. I am grateful for helpful comments from the seminar participants at the Department of Economics at Emory, the Western Economic Annual Conference, and the Department of Economics at Towson University. I would like to express my sincere gratitude to Anne Hannusch, Otto Lenhart, and Jethro Shrestha for their helpful comments and support. I take full responsibility for any remaining errors and lack of clarity.

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  1. Department of Economics, Towson University, Towson, MD, 21252, USA

    Vinish Shrestha

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Correspondence to Vinish Shrestha.

Appendix: data sources

Appendix: data sources

1.1 Alcohol control policies

1.1.1 Drinking and driving

To control for policies regarding underage drinking and driving, a state’s blood alcohol concentration (BAC) limit of 0.08 % and zero tolerance law is considered.

1.1.2 Sales restrictions

Several states REPEALED the Sunday sales ban law in the past decade and a couple of states have authorized a local option.Footnote 18 A dichotomous variable is created assigning a value of “1” if the Sunday ban prevails in the state; otherwise, the value given is “0.”

1.1.3 Keg information required

When selling kegs, sellers can potentially impose restrictions by recording identifying information about the purchaser. A dichotomous variable is constructed assigning a value of “1” if the sellers in the respective states are required by law to record a buyer’s information when purchasing kegs; otherwise, the value given is “0.” (Fig. 5; Tables 5, 6).

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Shrestha, V. Do young adults substitute cigarettes for alcohol? Learning from the master settlement agreement. Rev Econ Household 16, 297–321 (2018). https://doi.org/10.1007/s11150-016-9337-x

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