Interdependence of Tobacco and Alcohol Consumption: A Natural Experiment Approach

In this paper, we analyze the impact of smoking bans on restaurant and at-home alcohol consumption using rational addiction model. We use a pseudo-panel data approach which has many advantages compared to aggregate and panel data. While cigarette and restaurant alcohol consumptions fit well with the rational addiction model, at-home-alcohol consumption does not. This result might be due to possible inventory effects. Our results suggest that although cigarettes and alcohol reinforce each other in consumption, consumers substitute them when there are permanent changes in relative prices. In the semi-reduced system, the cross-price elasticity of restaurant(at-home) alcohol demand with respect to cigarette price is positive and significant. Based on model coefficients restaurant-alcohol consumption is a quasi-gateway for at-home-alcohol consumption. Smoking bans increase restaurant alcohol consumption. On the other hand, when blood alcohol concentration (BAC) limits decrease, both alcohol and cigarette consumptions decrease.