Addiction and Alcohol Consumption: evidence from Italian Data

In this paper we estimate the demand for alcoholic beverages in Italy following the rational addiction framework by Becker and Murphy (1988) and using a GMM estimator. To increase confidence in the reliability of this framework we use two different data sets: (i) a time series of annual aggregate alcohol consumption from 1960 to 2002 supplied by ISTAT; (ii) a time series of household data on wine, beer and liquor consumption recorded on a four-week basis from 1999:3 to 2004:4 and supplied by ISMEA-Nielsen. Both data sets support the hypothesis that alcohol consumers are actually forward-looking. Past consumption is significant in explaining current consumption thus detecting the addictive nature of alcohol. Short and long run price elasticities and the income elasticity of demand are also calculated. Interestingly, the long run income elasticity of demand, as derived from the rational addiction model, is higher than one both for aggregate and specific products so alcoholic beverages turn out to be luxury goods.