NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Anindya Sen

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May 2002Estimating Price Elasticities When there is Smuggling: The Sensitivity of Smoking to Price in Canada
with Jonathan Gruber, Mark Stabile: w8962
A central parameter for evaluating tax policies is the price elasticity of demand for cigarettes. But in many countries this parameter is difficult to estimate reliably due to widespread smuggling, which significantly biases estimates using legal sales data. An excellent example is Canada, where widespread smuggling in the early 1990s, in response to large tax increases, biases upwards the response of legal cigarette sales to price. We surmount this problem through two approaches: excluding the provinces and years where smuggling was greatest; and using household level expenditure data on smoking, where there is a downward bias to estimated elasticities from smuggling. These two approaches yield a tightly estimated elasticity in the range of -0.45 to -0.47. We also show that the sensitivit...

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