AN ECONOMIC ANALYSIS OF THE DETERMINANTS OF ALCOHOL AND TOBACCO

CONSUMPTION IN UGANDA

Richard Sebaggala1 & Isaac Musinguzi2

FINAL REPORT

1
Lecturer, Uganda Christian University and Associate Research fellow at Policy Analysis and Development
Research Institute
2
Teaching assistant, Uganda Christian University
Abstract
This paper focuses on determinants of alcohol and beer consumption in Uganda. The study using aggregated
panel data taken from fives waves of the Uganda National Panel Survey (2006–2013), adopted the classic
Becker-Murphy model of rational addiction to examine the influence of price, income and other socio-
economic factors on cigarette, tobacco, beer and other alcoholic consumption in presence of past and future
consumption in Uganda. The results show that beer consumption is consistent with rational addiction
model; past and future consumption are appropriate determinants of current consumption. The
insignificancy of price and income effect on beer demand is a pointer that beer consumption can be
effectively achieved through policies that affect habit formation. Although, the coefficients of past and
future consumption for other alcoholic drinks, cigarettes and other tobacco products contradicted the
rationality and are inconsistent with habit formation, the observed significant negative coefficients indicate
that consumers of these goods are aware of their negative effects. This underscores the role of education
programs that provides information regarding the potential dangers of addictive goods in curbing their
consumption. The positive effect of price of other alcoholic drinks imply that prices of these products are
too low and affordable; therefore price policies that reduce the consumption of cheap alcoholic products
such as minimum unit pricing are necessary. Finally, the negative effects of price on cigarettes and tobacco
demand provides the policy makers with alternative routes towards their reduction through effective tax
policies.

2
Table of Contents
Table of Contents ...................................................................................................................................... 3

1.0 Background to the study ................................................................................................................... 4

1.1 Statement of the problem .................................................................................................................... 5

1.2 Policy implication of the study ......................................................................................................... 6

2.0 Literature review ................................................................................................................................. 7

3.0 Methodology ................................................................................................................................... 10

3.1 Theoretical and econometric framework .......................................................................................... 10

3.2 Model estimations ............................................................................................................................. 14

3.3 Data ................................................................................................................................................... 14

4.0 Results ............................................................................................................................................... 16

4.1 Descriptive results ........................................................................................................................... 16

4.2 Econometric results ......................................................................................................................... 17

4.2.1 Demand for Beer and other alcoholic consumption ..................................................................... 17

4.2.2 Demand for cigarette and tobacco products ................................................................................. 22

5. 0 Conclusions and Recommendations ................................................................................................ 26

References ............................................................................................................................................... 27

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1.0 Background to the study
Demand estimations for alcohol and tobacco consumption have been of paramount interest to many
researchers in recent past. The research interest for understanding the demand for alcohol and tobacco
products have mainly been driven by three considerations. The first consideration is that the consumption
of alcohol and tobacco products is associated with negative social, health and economic consequences.
These include domestic violence, child neglect, labour market disincentives and poverty. For instance,
numerous studies have indicated that there is plenty of evidence demonstrating that excessive alcohol and
tobacco consumption is associated with a plethora of health-related, social, and economic adverse
consequences for the consumers as well as for society at large (WHO, 2015;WHO, 2008; Falk et al, 2006;
Sharp et al, 2001; Hidayat & Thabrany, 2010, 2011; Huang et al, 2004; Sayginsoy et al, 2002; Popovici &
French, 2011; Nguyen et al, 2012; and Kidane et al, 2015). For instance, world health report on the global
tobacco epidemic (WHO, 2015) argues that tobacco use is a significant hurdle to development gains
worldwide. Therefore under such circumstances, there has been need to undertake empirical analysis of
demand for alcohol and tobacco demand so as to understand how alcohol and tobacco users would respond
to price changes and other control policies.

The second consideration is related to the reluctance of many governments to implement policies that curb
alcohol and tobacco consumption. It should be noted that notwithstanding the vast literature that tax
increases that raises the price of tobacco and alcohol are the most powerful policy tool to reduce alcohol
and tobacco use, many governments have been hesitant to adopt tax policies as means to reduce alcohol
and tobacco consumption (Chaloupka et al, 2002; Sayginsoy et al, 2002). WHO report (2015) reported that
the proportion of low- and middle-income countries that have implemented sufficiently high taxes on
tobacco use is only 9%. The government fear is that tax increase and other proven cost effective alcohol
and tobacco control measures will harm their economies in terms of revenue, job and income losses. In
Uganda, whereas evidence has demonstrated that excessive alcohol and cigarette consumption are the key
drivers of household poverty, domestic violence, child abusive and neglect especially in the rural
countryside, there is still no detailed or structured program or framework to reduce consumption of these
legal substances in Uganda. The taxes on alcohol and tobacco products in Uganda are levied as a public
finance measure, not as a public health strategy and this explains why they have remained low. Uganda
has one of the lowest taxes on cigarettes in East Africa, below the recommended WHO tax rate3. Therefore,
many researchers are interested in evaluating the impact of different tax schemes on these goods in
promoting government revenues, improving general welfare and controlling consumption of these
substances.

The third consideration is related to the theoretical, econometric and data limitations of the earliest work
on alcohol and tobacco demand. It should be acknowledged that the earliest work on alcohol and tobacco
demand relied on using cross sectional and time series analysis based on conventional/standard demand
framework (Collis et al, 2010; Chaloupka, 1990). This framework assumed that alcohol and tobacco
behaves much like any other good and thus estimated the effect of prices and other factors on consumption
without taking into account the addictive nature of alcohol and tobacco consumption, i.e. they use static

3
The tax rate in Uganda is less than 75% of the retail price as recommended by WHO.

4
demand equations (Tiezzi, 2004). Indeed, before the early 1980’s, economists either ignored the addictive
nature of goods when estimating demand equations, or assumed that behaviors (such as smoking) were
irrational and could not be analyzed in the rational, constrained, utility maximizing framework of
economics. However, recent research evidence has demonstrated that that the demands for addictive
substances are not exceptions to the basic laws of economics (Ayda et al, 2001). Consequently, recently
many economists have adopted frameworks that incorporate the addictiveness of alcohol and tobacco
consumption using the desirable panel data framework (Sousa, 2014). Chaloupka (1990) argued that
economist have adopted models that capture the distinction between addictive consumption and other
consumption by recognizing that, for addictive goods, current consumption depends on the level of past
and future consumption. This time dependence of consumption incorporates the notions of tolerance,
reinforcement, and withdrawal characteristic of addictive consumption.

Notwithstanding the above considerations, although there has been numerous studies that adopt the use of
addictive model framework to understand the effects of prices and other socio-economic factors on the
demand for alcohol and tobacco products (see Becker & Murphy, 1988; Chaloupka, 1990; Becker,
Grossman & Murphy, 1990; Labeaga, 1993, 1999; Cameron, 1998; Grossman, Chaloupka and Sirtalan,
1998; Becker, Chaloupka and Warner, 2000; Baltagi and Griffin, 2001; Baltagi and Griffin, 2002; Jones
and Labeaga, 2003; Baltagi and Geishecker, 2006), all these studies have focused on developed economies.
In many developing countries, although there many compelling reasons to treat alcohol and tobacco
consumption different from other consumer goods due to their negative health, social and economic
consequences; few researchers have applied the dynamic specifications of alcohol and tobacco demand.
According to Hidayat et al, (2010), existing studies on price elasticities in developing countries do not use
models that incorporate addictiveness of cigarette smoking. The paucity of studies on alcohol and tobacco
consumption incorporating addictiveness using panel data framework can be blamed on the non-availability
of longitudinal data. Recently however, many developing countries including Uganda have collected
household panel surveys that can aid the application of myopic and rational models.

1.1 Statement of the problem

Although there is ample evidence that Africa region ranks high in alcohol and tobacco consumption (World
Bank, 2013), research evidence on the determinants of alcohol and tobacco consumption in these countries
is thin. In Uganda, it is estimated that 11.9 liters of pure alcohol are consumed per capita each year (WHO,
2011). This is nearly 2 times higher than the African regional average and 5 litres more than the global
average, making Uganda ranked among the highest consumers of alcohol. The WHO report reveals that
94% of Ugandans of 15 years and above drink one or more homemade beverages from fermented sorghum,
maize, millet, and fruit wine; and 4%; 1% and 2 % of Ugandans drink beer, wine and distilled spirits
respectively. The fact that alcohol and tobacco substances are often consumed together, tobacco
consumption is also high in Uganda. Available evidence reveals that Uganda is a tobacco-growing country
with about 22% of males and 4% of females between 15 and 49 years of age currently using tobacco
products (WHO, 2012). The current estimates from Tobacco Atlas, indicate that Uganda’s adult smoking
prevalence for males and females is 17% and 2% respectively in 2013 ( Chelwa, 2015). Surprisingly
however, although Uganda has continuously been among top consumers of alcohol and tobacco for many
years (WHO, 2004, 2008, and 2012), research evidence on what influence the consumption of these

5
addictive substances (alcohol and tobacco) is relatively little in the context of the theories of demand and
addiction. There is, to our knowledge two recent studies on alcohol and tobacco consumption in Uganda
by Stafström and Agardh (2012) and Chelwa, (2015) respectively. The Stafström and Agardh study not
only short on policy variables such as price, it was limited in scope because it relied on two cross sectional
data collected in 2005 and 2010 among high-income university students. Chelwa study although estimates
the price and expenditure elasticities of demand for cigarettes based on Deaton’s method, the estimates
ignores the role of addiction in consumption of cigarettes. Like Chelwa (2015), most research efforts on
alcohol and tobacco consumption in developing countries have ignored addictive behavior in consumption
of alcohol and tobacco products (Rahman, 2003). Ignoring myopic or rational addiction when estimating
alcohol and tobacco demand, may result in an underestimation of the price-sensitivity of alcohol/tobacco
consumption and limit designing effective policies to curb down alcohol and tobacco consumption in both
short-and long-term. This study therefore taking advantage of rich Uganda National panel survey data,
examined the influence of prices, past and future consumption, and other socio-economic factors on the
consumption of alcohol and tobacco products in Uganda.

1.2 Policy implication of the study

In the last two decades, many researchers from the developed countries have investigated the demand for
alcohol and tobacco using either the conventional demand approach or addictive models. The rational
addiction theory developed by Becker and Murphy (1988) has stimulated research efforts in the developed
countries. In many developing countries including Uganda such research enthusiasm has been limited.
There is, to our knowledge, relatively little existing evidence of consumer demand for alcohol and tobacco
products in many developing countries in the context of myopic and rational addiction framework using
panel data. Therefore, understanding the determinants of alcohol and tobacco consumption has important
policy recommendations. For instance, in Uganda, we do not have comprehensive policies or programmes
to help respond to the challenge of alcohol and tobacco consumption. In 2015, Uganda passed the Tobacco
Control Bill. The findings from the study can inform policy makers and other key stakeholders in tobacco
control on how effectively tobacco consumption can be managed. Nonetheless, the Second National
Development Plan 2015/16 – 2019/20 (NDPII) under sector target to contribute to the production of a
healthy human capital through provision of equitable, safe and sustainable health services has highlighted
two specific interventions related to alcohol and tobacco use: (i) Scale up demand reduction measures for
tobacco, alcohol and drug use, and (ii) Strengthen prevention and treatment of substance abuse, including
narcotic drug abuse and harmful use of alcohol. Therefore, findings from this study are useful in informing
policy interventions in relation to the production of a healthy human capital in Uganda. For instance, the
results of this research effort quantify the influence of price, income and other household factors on the
demand for alcohol and tobacco products in Uganda. The price elasticity of alcohol and tobacco results
have very strong policy recommendations in designing tax policy and other interventions.

6
2.0 Literature review
There has been extensive research effort focusing on the determinants of consumer demand both from
developed and developing countries in the last number of decades (Reidy & Walsh, 2011). However, the
extension of this type of analysis to include addictive goods (tobacco & Alcohol) has only happened
relatively recently and particularly few for developing countries. Most of the earliest studies on alcohol and
tobacco consumption and their determinants focused mainly in addressing data structure and modelling of
tobacco and alcohol consumption. Therefore, it is not surprising that most alcohol and tobacco studies either
used the sample selection models, Two-part and Hurdle models. Madden (2008) has provided a thorough
discussed of the difference between the Two-part and Hurdle models and their relative merits. The idea
behind the Hurdle model” is that two separate hurdles must be passed before a positive level of consumption
can be observed. The first hurdle involves the decision about whether or not to consume (participation
decision), while the second concerns the level of consumption (consumption decision). The Hurdle model
developed first by Cragg (1971) has been widely used in economics. For example, Moshoeshoe (2012) used
a Double-Hurdle model from the Household Budget Survey (2002/03 HBS) in Lesotho to estimate income
elasticities, in order to investigate the determinants of alcohol and tobacco consumption in Lesotho and the
study revealed that both alcohol and tobacco are income inelastic of 0.6553 and 0.3561, respectively and
also alcoholic beverages and tobacco are complementaries.

Madden (2002) also used a double-hurdle model to estimate whether decisions to smoke/drink are made
independently of how much to smoke/drink. The study found out that decisions to smoke/drink and how
much to smoke/drink are not independent. Yen & Jensen (1995) follow a similar approach, though they
modify it by using a non-normal and heteroscedastic double-hurdle model in order to contain zero
observations in the sample. They examined the determinants of household alcohol expenditures and in order
to do this; they examine the effects of explanatory variables by calculating and decomposing the elasticities.
They found out that income, region, education and household demographics as the significant determinants
of alcohol expenditures. In Tanzania, Kidane et al, (2015) study on the demand for cigarettes in Tanzania
and implications for tobacco taxation policy used a two-part model. The first equation was a logit model
on the determinants of “participation in smoking, while the second equation is the multiple linear regression
model on the determinants of the amount consumed among those who smoke. The results show that the
price elasticities of smoking participation, smoking intensity, and total elasticity were estimated at -0.879,
-0.853, and -1.732, respectively.

Angulo et al, (2000) used the double hurdle (DH) model after carrying out model selection tests among the
existing censured demand models (the double hurdle (DH) model; the purchase-infrequency model; and
the Tobit purchase-infrequency model, among others). They used the model to analyze the main
determinants of alcoholic beverages consumption at home, using the Spanish Household National Survey.
The study found out that social economic variables play an important part in consumer purchase and
consumer decisions of alcoholic beverages. Also, all expenditure elasticities were positive and own price
elasticities were negative. Aristei et al (2005) used the household expenditure data to analyze private
consumption behaviours in Italy. Ground & Koch (2007) looks at participation and expenditure
elasticiticies and employ two single-hurdle models across two commodities (alcohol and tobacco). The
findings showed that that one hurdle model consistently outperforms the other. In other alcohol/tobacco
7
demand studies, tobit model has been an alternative. However, several empirical studies have shown the
inadequacy of the Tobit model in cross-sectional analysis of alcohol/tobacco consumption, underlining the
importance of a bivariate generalization of this model (Yen and Jensen, 1995; Sharp et al, 2001).

Notwithstanding the numerous studies that have employed cross sectional and aggregate time series data
and model specifications described above, recently a growing number studies have estimated alcohol and
tobacco demand equations using panel data methods. Panel data techniques are used because they provide
a richer framework for addressing the issue of unobserved heterogeneity and allow the introduction of
dynamic elements, such as a lagged dependent variable, into the regression part of the model (Muhammad
& Ahmed, 2010; Muhammad & Wstabdulla, 2016). The use of panel data is considered to be appropriate
approach over cross sectional and time series because you can account for unobserved heterogeneity
between individuals/households and stronger causal inferences can be made (Meng et al, 2014). For
example, Belanciuc (2006) using a Heckman two-stage procedure estimated a static and dynamic Tobit
models for alcohol demand model using panel data from Ukrainian Longitudinal Monitoring Survey
(ULMS). In another study by Andrienko and Nemtsov (2006) using longitudinal survey of a representative
sample of Russian population, estimated a static and dynamic Tobit model in panel data framework.

However, it should be noted here that the use of panel data coincided with the adaptation of the rational
addiction model of Becker, Grossman, and Murphy (1994). According to Zanette (2016), the rational
addiction model has become the standard approach to model the consumption of addictive goods. The
rationale for its recent wide use and rapid acceptance is largely due to its theoretical rigour, and empirical
success in its key theoretical predictions. Therefore, there is growing number of studies employing the
myopic or rational addiction framework beginning with work of Becker, Grossman, and Murphy (1994).
There is no doubt that the model of rational addiction has subsequently become the standard approach to
modeling consumption of goods such as cigarettes and alcohol (see examples Chaloupka, 1990; Baltagi,
2007; Hguyen et al, 2012, Baltagi & Griffin, 2002; Hidayat &,Thabrany, 2011, Nichols, 2013). In most of
the studies reviewed on rational addiction model, three important features are discussed: reinforcement,
withdrawal and tolerance (Zanette, 2016; Castiglione and Infante, 2016; Koksal, 2012; Sisto and Zanola,
2004; Tiezzi, 2004). Zanette (2016) describes reinforcement to imply that greater past consumption of an
addictive good increases the desire for present consumption. Sisto and Zanola, (2004) describes
reinforcement to mean that an increase in past level of consumption increases the craving for present
consumption. In other words, that greater current consumption of a good causes its future consumption to
rise. This implies that there is positive correlation between time and consumption whether the consumption
good is harmful and beneficial (Castiglione and Infante, 2016). Withdrawal presents the loss of utility or
satisfaction following consumption cessation (Chaloupka, 1990; Tiezzi, 2004; Huang et al, 2004).
Tolerance on the other hand implies that the satisfaction from a given level of consumption is lower when
past level is greater or put simply tolerance suggests that a given level of consumption is less satisfying
when past consumption has been greater. In relation to smoking, Fenn (1998) describes tolerance to refer
to the practice of using increasing amount of a substance to provide the original level of satisfaction. He
argued that as cigarette smokers continue to smoke, they need larger doses of nicotine in order to achieve
a given level of satisfaction. That is to say, the continued use of cigarettes causes the body to develop a

8
tolerance to nicotine whereby larger doses are required to maintain satisfaction levels. Indeed, some
consumers, described as being 'myopic', may have such a high rate of preference for present consumption
such that the impact of tolerance effects on current consumption are negligible (Sisto and Zanola, 2004).

Evidence from econometric studies in developed countries applying the two models of addiction, myopic
and rational for tobacco and alcohol demand are growing. However, the conclusions from these studies are
mixed. For instance, some studies in United States, Australia and Finland have found support for rational
addiction model; other studies find little support for the rational addiction model. In low- and middle-
income countries, evidence from econometric studies is not different what has been observed in developed
countries. For example Wilkins, Yurekli, & Hu (2004) have argued that whereas tobacco studies have
estimated models of addictive behavior in low- and middle income, the evidence is mixed in support for
the hypothesis of rational addiction, but more generally supportive of myopic addiction.

9
3.0 Methodology

3.1 Theoretical and econometric framework

Traditionally, economists treated the demand for alcohol and tobacco products much like any other good
and therefore used the conventional demand theory (Collis et al, 2010; Chaloupka, 1990). For example,
Fenn (1998) argued that in the early 1970s some economists modeled the demand for cigarettes in the same
way as the demand for non-addictive. In this framework it is assumed that consumers demand alcohol and
tobacco products in order to maximize their utility subject to a set of constraints such as prices, income,
and other factors. This framework therefore considers consumption decisions at a given point in time to be
independent of past and future consumption (Fenn, 1998; Hidayat & Thabrany, 2011; Nichols, 2013).
Although, the conventional demand framework is simple and convenient, it is underspecified and its
estimated coefficients are biased and inefficient if effects of previous or future consumption on current
consumption are significant (Nichols, 2013). Nonetheless, the fact that alcohol and tobacco products have
been proved to be highly addictive in nature (see Andrienko & Nemtsov, 2006; Hidayat & Thabrany, 2011);
and numerous studies elsewhere have demonstrated the reinforcing role of the past and future consumption
on the alcohol and tobacco current consumption, there is no doubt that any economic study dealing addictive
goods such as alcohol and tobacco should consider the contribution rational addiction model (Fenn, 1998;
Castiglione and Infante , 2016; Castiglione et al, 2011).

Therefore, we followed the widely used theoretical model of rational addiction of Becker and Murphy
(1988) to understand the determinants of alcohol and tobacco demand. In this model framework, we
assumed that the past and future consumption of alcohol and tobacco products play a significant role in the
current consumption. Becker and Murphy (1988) argued that a consumer is potentially addicted to a good
if a rise in current consumption of the good increases future consumption. This argument implies that a
consumer is addicted to a good if, and only if, past consumption increases the marginal utility of present
consumption. In respect to alcohol and tobacco, it means that their current consumption is expected to be
positively correlated to past and future consumption.
Therefore, the primary focus of empirical implementation Becker-Murphy model of Rational Addiction
follows the following expression:

C    C
t 0 L t 1
  F Ct 1......................................................................................(1)

Where Ct is current consumption of the addictive commodity in question, Ct-1 is lagged or past,
consumption, with coefficient  L
and Ct+1 is leading or future consumption, with coefficient  F
. In the
implementation of the model, researcher always includes arrange of strictly exogenous variables including
prices income among others (Castiglione and Infante, 2015; Laporte, Dass and Ferguson, 2015).

The starting point of the theory of rational addiction is the myopic demand model of addictive consumption
that assumes consumers neglects the consequences of future actions (see Andrienko & Nemtsov, 2006;
Hidayat & Thabrany, 2010, 2011; Nichols; 2013; and Castiglione and Infante , 2015). The myopia
assumption means that consumer recognizes that present consumption of alcohol and tobacco depends on
past consumption but does not foresee that future consumption. Essentially, if alcohol and tobacco
10
consumption are not addictive, past consumption should have no effect on current consumption. However,
if alcohol and tobacco consumption are addictive but individuals are myopic, past consumption (lagged
consumption variable) should have a positive impact on current consumption, but future consumption
should have no effect. If consumers are rational then past and future consumption should have a positive
impact on current consumption.

To address these different consumer behaviours in the demand for alcohol and tobacco, we consider both
the myopic and rational model specifications. The myopic model assumes that consumers of alcohol and
tobacco products do not account for the impact of current consumption on future utility and consumption.
The myopic model can be expressed as follows:

C i ,t
  C i ,t 1
 Pr ice   Income   Z
i ,t it i ,t
  i ,t ....................(1)
0 1 2 3 4

where i is a household, t is time, C is consumption of either beer, other alcoholic drinks, cigarettes or other
tobacco products4. A significant and positive effect of previous consumption (measured by coefficient β 1)
on current alcohol or tobacco consumption indicates myopic addictive behavior (Hidayat & Thabrany,
2010, Nichols, 2013). Nonetheless, it should be noted that whereas a positive sign of the lagged
consumption coefficient suggests an increasing effect of lagged consumption on current consumption, and
interpreted as habit formation; obtaining a negative coefficient points to a decreasing effect of past
consumption due to the accumulation effect (Herzfeld, Huffman, & Rizov, 2014).

The equation (1) considers that current consumption of alcohol and tobacco products also depends on
current price and income. Empirical evidence has consistently shown that higher alcohol and cigarette
prices are associated both with less alcohol and cigarette consumption. In the survey, market and farm gate
prices were obtained for the type of alcohol beverages and tobacco products consumed by the households.
These were used to capture price effects on consumption of alcohol and tobacco products.
It has been noted in the literature that alcohol and tobacco are complementary goods in that those who
smoke also drink and vice versa. The interdependencies between alcohol and cigarette consumption warrant
incorporation of prices of alcohol in the tobacco demand function and vice versa. Their inclusion has
important implications from both econometric and policy perspectives. According to Yu & Abler (2009),
if there are interdependencies between alcohol and tobacco consumption, results from studies that ignore
this interdependence are biased and from a policy perspective, if results show that cigarettes and alcohol
are complements, taxing one will reduce the consumption of both and thus achieve a double public health
dividend. However, if they are substitutes, taxing one will induce consumers to increase consumption of
the other, offsetting the public health benefits of the tax. Therefore, prices of beer was included in the other
alcoholic drinks equation since beer is direct substitute for other alcoholic drinks and vice versa while the
cigarette of cigarette was included in the other tobacco products equation and vice versa. To estimate

4
The panel survey captures data on the number of beer drinks, other alcohol drinks, cigarettes and other tobacco
products consumed by household in the last 7 days and expenditure.
11
consistent elasticities and to ensure identification of actual demand responses, we generated real prices
adjusted for inflation using Consumer Price Index (CPI), published by the Uganda Bureau of Statistics.

Nonetheless, available literature shows a positive correlation between household income and tobacco and
alcohol consumption because both alcohol and tobacco demand have been found to have a strong habit-
persistence effect. Therefore, total household consumption expenditure was used as proxy for household
permanent income. This is based on permanent income hypothesis proposed by Friedman (1957) which has
been proved to appropriate for developing countries since the degree of measurement error is lower for
consumption expenditure than income. However, although higher income makes alcohol or tobacco
products more affordable, other factors being constant everything; the relationship is unlikely to be linear.
It has been argued that differences in income have a larger influence in affordability at the bottom end of
the income distribution than at the top end and this is why most demand specifications have used household
income in logs. In order to capture both the fact that higher income increases the affordability of alcohol,
while at the same time a higher number of people in a household will mean that, for the same level of
income, there is less disposable income per head, we divided total household income by the square root of
the size of the household instead of using household expenditure per household (Sousa 2014).

The vector Zi,t indicates a set of other control variables directly linked with alcohol or tobacco consumption
and these include; education, number of people of drinking/smoking age in the household, ratio of adult
males to household size, number of children in the household, household health status, and dummy variable
indicating marital problems, loneliness and unemployment. The description of these variables is as follows:

Number of people of drinking/smoking age in each household

Literature reveals that household with more people of drinking/smoking age are associated with higher
purchases of alcohol and tobacco products, other factors being constant. In order to control for this effect,
we include a variable to account for the number of people of drinking age in each household.

Ratio of adult males to household size

Many studies have shown that alcohol and tobacco consumption is more predominant among men than
women. Therefore, to capture the role gender of household members on alcohol and tobacco consumption
patterns, we generated the ratio of adult males to the total household size. This variable captured the role
gender bargaining power has on expenditure on alcohol and tobacco consumption.

Education
Generally speaking, cigarette and alcohol consumption is related to the education level. People who are
educated are more informed about severe health problems from smoking and therefore less likely to smoke
(Sayginsoy et al, 2002; Huang et al, 2004; Aristei & Pieroni, 2005). However, some studies have found out
that education is found to affect smoking and alcohol drinking differently. Moshoeshoe (2012) results
indicate that while having secondary and university education increases the probability of alcohol, it reduces
the likelihood of smoking. It is further noted that highly educated opt for more expensive brands of alcoholic

12
beverages. Sharpe et al (2001) using Korean Household Panel Study also found out that indeed higher
education levels were negatively associated with consumption level of alcohol. Therefore, in context of
our study, we expected more educated to significantly influence the consumption of beer than other
alcoholic drinks, which are largely locally made alcoholic beverages. Since we are dealing with household
level data, we computed the number of years of education of the most educated household members as the
education variable instead of the average education level of the household. The average education level of
household may be underestimated due to the presence of children who have not completed school.

Number of children in the Household

Research has demonstrated that the presence of children or number of children in the household is
negatively related to alcohol abuse and dependence. Nevertheless, having young children in the home is
assumed to moderate tobacco consumption. Therefore, include a variable the number of children less than
18 years in the household in the model estimations.

Dummy for marital problems, loneliness and unemployment

It is argued that marital problems, loneliness and being unemployed may lead to heavier smoking or alcohol
drinking and perhaps also higher percentage of smokers/drinkers of alcohol in the household. In Africa,
marital stability provide a sense of identity and behavioral guidance and therefore expect people who are
not divorced/separated , unmarried or widow(er) to have a more structured life and thus fewer opportunities
to drink/smoke heavily as this may interfere with their social roles (Kuntsche et al, 2011). Nevertheless,
Popovici & French (2013) argued that, from a psychological perspective, the financial challenges associated
with unemployment could increase tension, anxiety, and family discord, thus leading to increased alcohol
use. Therefore to capture these, a dummy variable that takes the value of 1 if there is at least one household
member who is a widow(er), divorced/separated, never married and above 35 years or unemployed was
generated.

For the rational addiction model specification, the current alcohol/or tobacco consumption depends on past
(lag) consumption, future (lead) consumption, prices, income and other factors as described above follows:

C i ,t
  C i ,t 1
 C i ,t 1
 Pr ice   Income   Z
i ,t it i ,t
  i ,t ....................(2)
0 1 2 3 4 5

The coefficient of future consumption (Ct+1 ) and its statistical significance, together with a reasonable
estimate of the discount rate5, gives a direct test of a Rational Addiction (RA) model against an alternative
model in which consumers are myopic addicts (Hidayat &Thabrany, 2010, 2011).

5
The estimate of the discount factor is defined as the ratio of the coefficient on the lead to that on the lags. The implied
discount rate is computed using this expression    1
1 2
13
3.2 Model estimations

In the estimation of the equations 1 and 2 for alcohol (beer, and other alcohol) and tobacco products
(cigarettes and other tobacco products), we ignored the zero observations and estimated the demand
equations restricted to households only declaring strictly positive amounts of alcohol and tobacco
consumption during the panel period. Instrumental variable (IV) methods are often used to estimate these
kinds of models because of the endogeneity problem implied by the presence of the lagged and lead
dependent variable among the regressors (Tiezzi, 2004; Hidayat & Thabrany, 2010, 2011). The use of
instrumental variables estimators (IV), in particular 2SLS has proved to be an appropriate solution provided
the error variances over observations are homoskedastic. Therefore, to select the appropriate estimation
strategy, two groups of econometric specifications were explored. The first group included estimators
ignoring the endogenous-regressors problem, including OLS, fixed effects (FE), and random effects (RE).
The second group includes estimators that treat error-in-variables and unobservable heterogeneity: two-
stage least squares (2SLS), fixed effects two-stage least squares (FE2SLS), and random effects two-stage
least squares (RE2SLS).

We performed numerous tests in order to select the most appropriate estimator. Since, we suspected that
the lagged and lead consumption variables are likely to be endogenous. We implemented Davidson and
Mackinon test of exogeneity through Stata command (dmexogxt). The dmexogxt command computes a test
of exogeneity for a fixed-effect regression estimated via instrumental variables, the null hypothesis for
which states that an ordinary least squares (OLS) estimator of the same equation (i.e., xtreg, fe) would yield
consistent estimates: that is, any endogeneity among the regressors would not have deleterious effects on
OLS estimates. To confirm exogeneity results of Davidson and Mackinon test, the widespread endogeneity
of Hausman was also performed. If lagged consumption is found to be exogenous, we estimated either
OLS, FE or RE. Breusch-Pagan Lagrange Multiplier test and Hausman specification test were used to select
the appropriate estimator of the three. However, if we found that lagged consumption is indeed endogenous,
the 2SLS estimator would be employed. The use of 2SLS estimators requires an appropriate set of
instruments, i.e instruments that are uncorrelated with the time varying error component. Since, evidence
show that prices are suitable instruments because are strongly correlated with consumption, two lags and
two leads of the price would be the appropriate instruments for myopic and rational addictive models
respectively (Nichols, 2013; Nguyen et al, 2012; Baltagi, 2007; Tiezzi, 2003; Becker et al, 1994).

3.3 Data
We utilized the panel survey of households covered during the 2005/06, 2009/10, 2010/11, 2011/12 and
2012/2013 conducted by the Uganda Bureau of Statistics (UBoS). Out of the 7,400 households interviewed
during the UNHS 2005/06, 3,123 households were selected for the Uganda National Panel Surveys (UNPS).
First wave was completed in 2006, the second in 2009, the third in 2010, the fourth in 2011 and latest in
2013. During data collection, households or individuals that had permanently left the original households
to known locations were tracked and interviewed. The panel surveys are based on the two-stage stratified
random sampling procedure. In the first stage, the enumeration area (EA) stratified according to spatial

14
location were the principal sampling unit, and the selections of EAs, was based on the 2002 census as the
frame. In the second stage, 10 households were randomly selected from each of the EAs.

The paper utilizes data on beer, other alcohol consumption, cigarette and tobacco smoking and socio-
economic related predictors from the Household Panel Survey for the year 2006-2013. The sample is an
unbalanced panel of 3123 households observed during the time period, 2006-2013 with total observations
equal to 11954. The data on alcohol and tobacco consumption was obtained from socio-economic module.
In the module households reported their consumption expenditure on item-by item basis including alcohol
and tobacco using a 7-day recall period. From the expenditure data it is possible to get the number of beer
drinks, other alcohol drinks, cigarettes and other tobacco products consumed by a household in a week and
the total amount of money spent by household on alcohol and tobacco. Such short-term weekly recall
approach allows the respondents to correctly recall all their consumption during that period hence
improving the accuracy of consumption data obtained.

The unit of analysis was a household level. The dependent variable included Beer consumption and other
alcohol drinks measured in litres and Cigarette and Tobacco consumption measured by the number of
cigarettes or tobacco products generated by dividing the household expenditure on cigarette and tobacco
with price of cigarette and other tobacco products respectively. We used expenditure information on
cigarette and tobacco consumption to generate cigarette and other tobacco product consumption variables
because it was difficult to standardize these consumption into standard units as was the case with beer and
other alcohol drinks.

15
4.0 Results
In this section, we present the main empirical results. We start by describing the household consumption of
alcohol and tobacco products over the estimation period. Next the results from the myopic and rational
model estimations for beer, other alcohol drinks, cigarettes and other tobacco products are presented.

4.1 Descriptive results

The results in figure 1 below show that between 2006 and 2013 cigarette and other tobacco product
consumption ranges between 5% and 9% and between 5% and 12% respectively. The total tobacco
consumption is ranges between 10% in 2013 and 21% in 2006. Overall, the consumption of tobacco
products in Uganda is 16% slightly above the AFRO total smoking prevalence of 15%6 (see WHO, 2015;
Chelwa, 2015). This implies that Uganda’s total tobacco consumption is higher than the AFRO estimates
and therefore one of countries in Africa with high tobacco consumption prevalence. Nevertheless, evidence
shows that although the AFRO smoking prevalence is lowest in the WHO’s 6 regions in world, estimates
show that AFRO is only one of two regions where total smoking prevalence is projected to increase to 20%
by 2025 if the current level of implementation of tobacco control efforts is maintained (Chelwa, 2015). In
respect to beer and other alcohol consumption, the results show that other alcohol drink consumption
consistently between above 15% between 2006 and 2013. Beer consumption ranges between 5% and 8%
over the same period. This implies that total alcohol consumption is between 23% and 27%. These results
confirm the WHO estimates over the years that have ranked Uganda among the major consumers of alcohol
in Africa. Nevertheless, the fact that Ugandans consume more of other alcohol drinks (locally made brew
and spirits) other beer indicate the country’s vulnerability to health and social problems associated with
the consumption of these alcohol products.

6
AFRO refers to the Africa region

16
Figure 1: Percentage of households who consume alcohol and tobacco

19%
20% 19%
18% 18%
17%
18%
16%
16%

14%
12%
12%
9%
10% 8% 8% 8% 9%
8%
8% 7% 7% 7%
7% 6% 6%
6% 6%
6% 5% 5% 5%

4%

2%

0%
2006 2009 2010 2011 2013 Overall
Wave

Cigarette Tobacco Alcohol Beer

4.2 Econometric results

4.2.1 Demand for Beer and other alcoholic consumption

The David and Mackinon test for exogeneity and Hausman test for endogeneity were implemented to assess
whether the lagged consumption variable for beer and other alcoholic drinks were exogenous. The results
from the test revealed that both the lagged consumption variables were exogenous7, suggesting that OLS
results would be consistent in parameter estimates. Therefore, the use of instrumental variable estimation
was regarded unnecessary. The choice therefore was to choose from the three estimators: POLS, FE or RE.
To decide between FE and RE model, Hausman specification test was applied. For beer equation, the
Hausman test p-value of 0.0676 indicates that RE model was preferred over FE. We implemented the
Breusch-Pagan Lagrange multiplier (LM)-xttest0 Stata command to decide between a random effects
regression and a simple OLS regression. We failed to reject the null hypothesis and concluded that random

7
David & Mackinon and Hausman p-values of 0.5791 and 1.000 were obtained for the beer equation and p-values
of 0.1367 and 0.9995 for other alcoholic drinks respectively. Similar conclusions were reached for lead beer and
other alcoholic consumption.

17
effects model is not appropriate in favour OLS. For the case other alcoholic drinks, the Hausman test results
show that FE model was preferred over the random effects (p-value=0.000). The models are estimated with
robust to obtain heteroskedasticity-robust standard errors. Table 1 presents both the pooled OLS and Fixed
Effects results. For comparison purposes the conventional demand function is estimated alongside the
myopic and rational addictive models.

The coefficient of lagged beer consumption is positive and significant implying that beer consumption is
strongly influenced by the past consumption. This demonstrates a strict complementarity between the past
and current beer consumption. The positive and significant past consumption coefficient is a testimony that
Uganda beer consumers are myopically addicted to beer consumption. Similarly, the coefficient of lead
beer consumption is positive and significant as predicted by the rational addiction theory. The significance
of both the previous and future consumption of beer on current consumption is a proof that the conventional
demand model is underspecified and the estimated coefficients are biased and inefficient (Nicholas, 2013).
Nonetheless, the fact that lagged and lead consumption coefficients are positive and the estimated discount
rate is positive8 shows that beer addiction is consistent with a rational behaviour. The R-squared of both
myopic and rational addiction models and insignificancy of both income and own price for beer is the
testimony that beer consumption is addictive good driven by past and future consumption and this has
implications on beer control interventions. In relation to price and income, the results concur with other
studies which have demonstrated that beer consumption is relatively insensitive to price and income
changes (Chaloupka, 2004; Chaloupka, Grossman & Saffer, 2002, Castiglione et al, 2011; Mairey, 2012).
Indeed, earliest the conventional wisdom suggested that price will not matter much to those who have
become addicted (Cook and Moore, 2002).

However, for other alcoholic drinks, it is evident in the Table 1 that both the coefficient of lagged and lead
consumption variables is negative and significant for both the myopic and rational addictive models. This
finding does not only contradict rationality but also is inconsistent with habit formation. Koksal (2012) has
argued that negative coefficient of both lagged and lead alcohol consumption may due to inventory effects
associated with deriving consumption from expenditure data. The significant and negative coefficient of
both lagged and lead consumption variables may reflect a decreasing cumulative effect associated with the
consumption of alcohol products arising from consumer’s awareness of adverse consequences of alcohol
consumption.

The price of other alcoholic drinks is positive and significant contrary to conventional negative effect. The
results show that price elasticities for other alcoholic drinks are 0.13, 0.10 and 0.10 for conventional,
myopic and rational addiction models respectively. This implies that 10% increase in price of other
alcoholic drinks will increase their consumption by 1 percent. The fact that most Ugandans drink
homemade beverages and distilled spirits which are priced lowly compared to wine and beer and mostly
consumed by heavy drinkers, it is plausible to assume that positive elasticity reflect the true picture of the
relationship between price and other alcoholic drinks in Uganda. Heavy drinkers tend to gravitate towards

8
Since the coefficient on lagged consumption (1.002) is higher than the coefficient on lead consumption (0.501)

18
the cheapest alcohol and because the prices of products are too low, a unit increase in price is likely to
increase their consumption rather reduction.

The number of adults in the household was also found to significantly influence the consumption of other
alcoholic drinks. It evident that 10% increase in the number of adults in the household will drive alcohol
consumption by more than 2% reflecting the role of household composition in alcohol consumption. The
result concurs with prior expectation that households with more people of drinking age are associated with
higher consumption of alcohol. The positive significant effect of income was only observed for beer albeit
in the conventional demand model. Furthermore, the results in Table 1 show that ratio of adult males to
household size, education, number of children, reported number of adults with illness and dummy for
marital problems, loneliness and unemployment did not have significant influence on beer and other
alcoholic consumption.

19
Table 1: POLS and Fixed Effects Estimation for Beer and Other alcoholic drinks

Variables Conventional Myopic Rational Conventional Myopic Rational

Beer consumption equation Other alcoholic consumption equation
POLS estimation Fixed effects estimation
Lagged consumption (In) n.a 1.002*** 0.501*** n.a -0.251*** -0.313***
(0.00185) (0.0775) (0.0317) (0.0291)
Lead consumption (In) n.a n.a 0.498*** n.a n.a -0.357***
(0.0764) (0.0251)
Price of beer (In) 0.248** 0.00362 -0.000787 0.00420 -0.00999 0.000107
(0.0964) (0.00401) (0.00236) (0.0508) (0.0493) (0.0457)
Price of Alcoholic drinks (In) -0.0317 -0.000807 -0.000190 0.126** 0.104* 0.1000*
(0.0351) (0.00104) (0.000527) (0.0567) (0.0559) (0.0517)
Household Income (In) 0.333*** 0.000594 0.00105 0.0766 0.0555 0.0247
(0.0360) (0.00125) (0.000755) (0.0492) (0.0474) (0.0418)
Number of adults in HH (In) 0.106 -0.000255 1.56e-05 0.282** 0.219* 0.238**
(0.0756) (0.00153) (0.000982) (0.121) (0.115) (0.104)
Ration of adult males to household size (In) 0.289 0.00547 0.00170 0.0824 0.0265 0.0639
(0.213) (0.00488) (0.00345) (0.272) (0.254) (0.242)
Number of Children in HH (In) -0.0274 -0.000830 -0.000669 0.0145 0.0270 0.0304
(0.0572) (0.00161) (0.00101) (0.0920) (0.0869) (0.0829)
Max education of HH member (In) -0.0287 -0.000878 0.00120 -0.00291 -0.00903 -0.0408
(0.0664) (0.00198) (0.00142) (0.0908) (0.0856) (0.0785)
No of adults who reported illness in HH (In) -0.0534 0.000590 0.000731 -0.0450 -0.0427 -0.0475
(0.0605) (0.00193) (0.00129) (0.0636) (0.0615) (0.0585)
Dummy for marital problems, loneliness & -0.189** 0.00249 0.000722 0.0488 0.0449 -0.00352
unemployment
(0.0847) (0.00319) (0.00181) (0.0919) (0.0866) (0.0826)
Constant -4.128*** -0.00982 -0.0137 -0.761 -0.291 0.352
(0.444) (0.0147) (0.00884) (0.608) (0.598) (0.518)
Observations 745 744 743 2,108 2,107 2,106
R-squared 0.167 0.999 1.000 0.018 0.085 0.223
Notes: Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

21
4.2.2 Demand for cigarette and tobacco products
The David and Mackinon and Hausman test for exogeneity was implemented to assess whether the lagged
and lead consumption variable for Cigarette and tobacco products were exogenous. The test results revealed
that lagged consumption variables for cigarette was endogenous while for the tobacco was exogenous9.
The test results were confirmed using the Hausman test for endogeniety. Therefore, the use of instrumental
variable estimation was regarded necessary for cigarette consumption and unnecessary for the tobacco
products. We used a Fixed Effects two stage least squares (FE2SLS) estimation for cigarette consumption
equation, a traditional approach to overcome the economic problems caused by the presence of
predetermined or endogenous variables when using panel data (Tiezzi, 2004). Indeed, most empirical
support for the rational addiction model has rested precariously on the FE2SLS. For the myopic model ,
two lags of own prices plus the other explanatory variables was used as instruments while for the rational
model , two lags and two leads of own prices plus other explanatory variables (Nguyen et al, 2012). We
tested whether two lags and two leads of own prices are strong instruments by running reduced form
regressions where the lagged and lead cigarette consumption are used dependent variables and instruments
and other exogenous factors as explanatory variables. The F-test results suggests that two lagged and lead
price variables are statistically significant in determining lagged and lead consumption of cigarettes.

For tobacco product equation, the choice was between three estimators: POLS, FE or RE. We implemented
the Breusch-Pagan Lagrange multiplier (LM)-xttest0 Stata command to decide between a random effects
regression and a simple OLS regression. Results show that RE was favoured over the POLS (p-
value=0.000). FE model was favoured over RE for tobacco product equation based on Hausman
specification test (p-value=0.000). The equation is estimated with robust to obtain heteroskedasticity-robust
standard errors. Table 2 presents both the FE2SLS and FE results. For comparison purposes the
conventional demand function is also estimated alongside the myopic and rational addictive models for
both cigarette and tobacco equations.

Lagged and lead consumption variables for both cigarette and tobacco are negative and statistically
significant, which does not only contradict rationality but also inconsistent with habit formation. However,
since past and future consumption in rational model usually serve as measurable approximations of
preferences, it is plausible to argue that cigarette and tobacco consumption is not associated with habit
persistence. This may seem to imply that consumers of cigarette and tobacco products in Uganda might
have realized the negative effects of previous and future consumption and therefore altered their behaviours.
The result may imply that the demand is decreasing in total cumulative cigarette and tobacco intake due to
consumer’s awareness of adverse health effects associated with consumption these substances. Orphanides
and Zervos (1995) argued that negative coefficient of the past and future consumption may signal the
importance of information about health consequences of addictive consumption. Nonetheless, given that
the lagged and lead coefficients of cigarettes are negative and larger than tobacco products, it may imply

9
David & Mackinon and Hausman p-values were 5.9e-04 and 2.9e-05 for lagged and lead consumption of cigarette
respectively. David & Mackinon and Hausman p-values were .3875 and .3164 for lagged and lead consumption of
tobacco respectively
that consumers of cigarette products would be more aware of the consequences of the negative
consequences of too much consumption of cigarettes on health.

The price of cigarettes has negative and significant coefficient in the conventional, myopic and rational
model. This confirms the consumption reducing role of price among addicts observed in many studies.
However, it is evident in Table 2 that the conventional demand function has high short-run price elasticity
estimate −0.875. The coefficient of the own price of cigarette become smaller in the myopic model (-0.495)
and are short-run price elasticity is even smaller in the rational model. This means that the conventional
model exaggerated the effect of price on consumption. The estimated short-run price elasticities of demand
for cigarettes that vary between -0.495 and −0.336 suggests that a 10 percent increase in cigarette prices
would lead to between 5 and 3 percent decrease in cigarette consumption in the short run. These results fall
within the range of estimates for low and middle income countries (-0.2 and -0.8) and comparable with
recent price elasticity estimates of cigarettes for Uganda by Chelwa (2015) of between 3% and 4%. The
short-run price elasticities for tobacco products are higher than those cigarettes between -.06 and -0.5. This
implies that the demand for tobacco products in Uganda is expected to decline, at the very least, by between
6% and 5% for every 10% rise in prices.

Whereas household income had significant positive effect in the conventional demand equation, it is
insignificant in both the myopic and rational model specifications. However, the income elasticities are
positive and statistically significant in the conventional, myopic and rational model specifications for
tobacco consumption. The positive and significant income elasticities imply that estimated impact of
income on tobacco consumption increase by approximately 2 % for 10 % increase in household income.
This further implies that tobacco consumption is a normal good. The low values of income elasticity value
show that the demand for tobacco is income inelastic; confirming that the demand for addictive goods is
less sensitive to income changes.

The number adults in the household and higher educated member in the household are associated with
significant positive effect on consumption of cigarette and tobacco respectively, other factors being
constant. We did not find significant effect of ratio of adult males to household size, number of children,
reported number of adults with illness and dummy for marital problems, loneliness and unemployment for
both cigarette and tobacco consumption.

23
Table 3: Fixed effects estimation for Cigarette and tobacco products
Variables Conventional Myopic Rational Conventional Myopic Rational
Cigarette consumption equation Tobacco consumption equation
Fixed effects 2-Stage Least Squares Fixed effects estimation
Lagged consumption (In) n.a -1.000*** - n.a -0.288*** -0.308***
0.397***
(0.442) (0.100) (0.0338) (0.0315)
Lead consumption (In) n.a n.a - n.a n.a -0.316***
0.931***
(0.348) (0.0318)
Price of cigarette (In) -0.875*** -0.495*** -0.336* 0.0566 0.0480 0.0397
(0.0357) (0.179) (0.188) (0.0467) (0.0437) (0.0406)
Price of tobacco product (In) 0.00995 0.109 -0.358 -0.671*** -0.607*** -0.522***
(0.157) (0.273) (0.281) (0.0529) (0.0499) (0.0465)
Household Income (In) 0.191*** -0.00515 0.103 0.156*** 0.169*** 0.151***
(0.0553) (0.129) (0.0888) (0.0524) (0.0497) (0.0449)
Number of adults in HH (In) 0.316 0.402 0.775** -0.148 -0.191 -0.179
(0.197) (0.341) (0.346) (0.142) (0.130) (0.117)
Ration of adult males to household size (In) -0.608** -0.512 0.0505 -0.0471 0.000391 0.0515
(0.249) (0.431) (0.462) (0.250) (0.250) (0.239)
Number of Children in HH (In) -0.0416 0.0679 -0.0634 -0.0712 -0.0671 -0.0246
(0.108) (0.191) (0.169) (0.0954) (0.0891) (0.0743)
Max education of HH member (In) 0.0413 0.0678 0.0247 0.269*** 0.242*** 0.222***
(0.107) (0.185) (0.166) (0.0700) (0.0640) (0.0539)
Number of adults reported illness in HH (In) 0.0106 0.0958 0.0223 0.0281 0.00944 -0.00826
(0.0735) (0.132) (0.114) (0.0699) (0.0637) (0.0588)
Dummy for marital problems, loneliness & unemployment 0.116 0.213 0.159 0.0922 0.0506 0.0551
(0.110) (0.194) (0.170) (0.0885) (0.0938) (0.0854)
Constant -0.0972 4.289* 3.672** -0.691 -0.452 0.0516
(0.743) (2.321) (1.648) (0.698) (0.674) (0.601)
Observations 835 834 831 1,019 1,018 1,017
R-squared 0.649 0.289 0.372 0.472
Notes: Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

25
5. 0 Conclusions and Recommendations
The consumption of alcohol and tobacco products has attracted interest from both the economic and social
perspective because their consumption have negative social, health and economic consequences; reluctance
of governments to implement policies that curb alcohol and tobacco consumption and methodological
challenges. The main purpose of this paper was to examine the determinants of alcohol and tobacco
consumptions in Uganda. The paper adopted the Becker-Murphy model of rational model and applied it to
Uganda Panel Household Survey data for beer, alcoholic drinks, cigarettes and tobacco consumption.

The results demonstrate that beer consumption is significantly driven by the past and future consumption.
The fact that price and income are not significant for beer demand and the high R-squared values is an
indication that beer consumption is an addictive and its consumption is entirely driven by past and future
consumption. This implies that beer consumption is driven by habit formation and any effort to reduce its
consumption lies in policies that affect or alter habit formation. For instance, policies that ban beer
advertisement or legislations that restrict beer consumption, education programs that discourage beer
consumption or target cultural or behavior change through creating positive attitudes and choices can be
effective in reducing beer consumption in Uganda.

The price of other alcoholic drinks is positive and significant implying that increase in price is associated
with increased consumption. The fact that other alcoholic drinks are majorly homemade and locally distilled
alcohol products that are cheaply priced and commonly consumed by heavy drinkers is testimony that these
products are more affordable. Evidence shows that as alcohol becomes more affordable, consumption
increases. The minimum pricing policy has been documented as the best strategy for affordable alcohol
consumption. The policy has the potential to impact consumption among the young people,
hazardous/harmful drinkers and the low income groups.

The negative coefficient of past and future consumption of alcoholic drinks, cigarettes and tobacco products
although they contradict rationality and inconsistent to habit formation of addicts, the results indicate that
addicts are not “happy addicts” has theory predicted. It is plausible to argue that the majority of consumers
of these substances become addicted unknowingly. This finding underscores the importance of education
programs that provide information regarding the potential dangers of addictive goods in reducing
consumption.

Nonetheless, the results demonstrate that cigarette and tobacco own prices have negative effect on the
consumption. Therefore, increasing cigarette and tobacco prices via excise taxes can control cigarette and
tobacco use and also raise government revenue. The fact that price elasticities of cigarette and tobacco
products are less than one, imply that there demand is inelastic. This suggests that a percentage increase in
prices of these products would always be larger than the consumption response and therefore have potential
to reduce consumption and raise government revenue.
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