An Econometric Analysis of Cigarette Price Search and Tax Incidence

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DESCRIPTION (provided by applicant): Cigarette taxation is a well-established part of tobacco control policy. To further improve our understanding of the consequences of cigarette taxes, the broad objective of the proposed research is to conduct an exploratory economic analysis of cigarette price search. The proposed project will use national data from the 2003 Tobacco Use Special Cessation Supplement to the Consumer Population Survey. The 2003 TUSCS contains novel data on price search behavior including: the price paid for cigarettes; whether smokers usually buy packs or cartons of cigarettes; whether their last cigarette purchase was in some other state than their state of residence; and whether their last cigarette purchase was over the internet or some other means. To explore border crossing in more depth, we also propose to analyze data from the New York State Adult Tobacco Survey. Similar to the TUSCS, the NYS-ATS contains measures of border crossing and the prices paid for cigarettes. New York is a good "laboratory" to study border crossing because it includes New York City, which has a high local cigarette tax, and a number of Native American Reservations, which are important sources of low price cigarettes for many New Yorkers. Specific Aim 1 is to estimate econometric models of the impact of border crossing on the price paid for cigarettes. We will use distance to the border as the key instrumental variable to identify an endogenous treatment effect model and an endogenous switching regressions model of the impact of border crossing on prices. Border crossing is an important form of price search that might have a major impact on the price paid for cigarettes. Estimating the magnitude of its causal impact is important in its own right and will shed light on broader questions about the role consumer search behavior plays in consumer responses to tobacco control policies. Specific Aim 2 is to use the econometric results to conduct a novel analysis of how the burden of cigarette taxes is distributed across different groups of smokers. The analysis will extend the standard analysis of tax incidence across income groups to explore how price search changes tax incidence. PUBLIC HEALTH RELEVANCE: Cigarette taxes are often seen as way to prevent smoking, the leading preventable cause of death in the U.S. The proposed project will explore actions consumers take to find lower price cigarettes even in the face of high taxes. By improving our understanding of this behavior, the project will contribute to more effective tobacco control policies.