Taxes, cigarette consumption, and smoking intensity

This paper analyses the compensatory behavior of smokers. Exploiting data on cotinine concentration-a metabolite of nicotine-measured in a large population of smokers over time, we show that smokers compensate for tax hikes by extracting more nicotine per cigarette. Our study makes two important contributions. First, as, smoking a given cigarette more intensively is detrimental to health, our results, question the usefulness of tax increases. Second, we develop a model of rational addiction where agents can also adjust their intensity of smoking, and we show that the previous empirical results suffer from estimation biases.