Estimating tobacco price elasticity in Kosovo: using the micro data from Household Budget Survey (2007 – 2017) and Deaton demand model
Abstract: This analysis aims at estimating price elasticity of demand for cigarettes in Kosovo. Data from Kosovo Household Budget Survey for the years from 2007-2017 are used and the Deaton demand model is utilized to make the estimations. Deaton (1988) demand model uses unit values as a proxy for price, spatial variation, and the structure imposed by a weak separability assumption account for the effect of the quality of the good. Basic idea of the model is that all households within a cluster (typically a small territory unit, such as municipality or village) face the same market price and that within-cluster variations in purchases depend only on total household expenditure and household characteristics, while cross-cluster variations in purchase are due to genuine price variations, among other factors. The estimation of the model consists of three stages. Results of the estimation indicate a negative price elasticity of cigarettes which amounts to −0.288.Standard error of the elasticity calculated via bootstrapping procedure (1000 replications) indicates that the elasticity is significantly lower than zero (ξ= -0.288; SEξ = 0.097, t = -2.969).
Keywords: Tobacco consumption, Deaton demand model, Household, Expenditure, Demand elasticity, Kosovo