| Abstract: | This paper uses data on cigarette consumption in the Current Population Survey Tobacco Supplements to estimate cigarette demand models that incorporate the decision of whether to smuggle cigarettes across a lower–price border. I find demand elasticities with respect to the home state price are indistinguishable from zero on average and vary significantly with the distance individuals live to a lower–price border. However, when smuggling incentives are eradicated, the price elasticity is negative but still inelastic. I also estimate between 13 and 25 percent of consumers purchase cigarettes in border localities. The central implication of this study is cross–border smuggling confounds many of the potential health and revenue gains from cigarette taxation. |
