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 suggests that although cigarettes and alcohol reinforce each other in consumption, consumers substitute them when there are permanent changes in 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. We find that smoking bans increase restaurant alcohol consumption, but decrease at-home alcohol consumption. After a smoking ban is imposed, nonsmokers are likely to stay longer at restaurants and consume more alcohol. On the other hand, when smokers are not allowed to smoke at the restaurants, they are likely to compensate it by increasing their restaurant alcohol consumption. As smoking bans builds on social drinking habits, we observe a decrease at at-home alcohol consumption. On the other hand, when blood alcohol concentration (BAC) limits decrease, both alcohol and cigarette consumptions decrease