2020 Rainmaker Start-up: Dynamic Analysis of Addiction: Intra-household resource allocation towards addictive goods and policy issues.

The consumption of alcohol, tobacco and other drugs is a major cause of preventable disease and illness in Australia (AIHW 2020). There has been a long-term downward trend in tobacco smoking and alcohol consumption in Australia. Nevertheless, tobacco smoking remains the leading preventable cause of death in Australia, while a substantial proportion of drinkers consume alcohol at a level that increases their risk of alcohol-related harm (AIHW 2020). On the other hand, there has been a notable increase in the proportion of people who had used an illicit drug in their lifetime since 2001 in Australia (AIHW 2020). Therefore, harm minimisation arising from the consumption of addictive commodities, by means of demand reduction, supply reduction and harm reduction, is of utmost importance to Australia. This project concentrates on the demand reduction aspect by identifying the habits, complementarities and heterogeneity in alcohol, tobacco and illicit drug demand. Overall, this project has strong potentials to inform alcohol, tobacco and illicit drug pricing and control policies in Australia and beyond.
In doing so, this project examines the effects of socioeconomic and demographic factors on Australian individuals’ demand for addictive commodities; alcohol, tobacco, and illicit drug. While the three commodities are commonly considered closely related addictive goods, there may be significant heterogeneities associated with individual characteristics of the consumers and some correlations via the unobservable characteristics.
This project also identifies whether there is an existence of forward‐looking behaviour in alcohol, tobacco and illicit drug consumption. The dynamic adjustment cost model with forward‐looking behaviour enables the identification of intertemporal interactions between these goods. The analysis of the within‐period preferences completes the intertemporal model, allowing to evaluate the static substitutability/complementarity relationships across the three commodity types.