Discussion Paper

Alcohol/Leisure Complementarity: Empirical Estimates and Implications for Tax Policy

Mar 31, 2009 | Sarah E. West, Ian W.H. Parry

Abstract

This paper provides a first attempt to estimate the cross-price elasticity between alcoholic beverages and leisure, which is critical for assessing how much alcohol taxation might be warranted on fiscal grounds. We estimate an Almost Ideal Demand System defined over alcohol, leisure, and other goods, using data from the Consumer Expenditure Survey and other sources. Our results suggest that alcohol is a relative complement for leisure over a range of specifications. This implies that the optimal alcohol tax may substantially exceed the Pigouvian tax, reinforcing the efficiency case for higher taxation. These findings should be viewed as preliminary however, given a number of data and other limitations of the analysis.