Tobacco & Nicotine

Phillip K. Lowrey (1991)

I. INTRODUCTION

Social discord regarding cigarette smoking has existed in the United States for the past

fifty years. The nicotine absorbed from tobacco consumption is addictive; such

consumption produces negative spillovers and medical research findings link smoking with

poor health. Anti-smoking interest groups have argued for a diminution of the practice.

Pro-smoking interest groups have reacted to this attack, and federal regulatory action has

resulted from the ensuing political battles. This paper analyzes the act of cigarette

consumption, with attention given to the interest group dialogue, cigarette/tobacco

industry, and effects of government regulation.

Section II examines the role of nicotine in individual cigarette consumption. The

tobacco-health situation is presented in Section III, and a theoretical model in Section IV.

Descriptions of the tobacco industry and government regulation appear in Sections V and

IV. An empirical model is provided in Section VII. Finally, Section VIII offers concluding

remarks. The Appendices contain empirical model data and econometric output.

II. NICOTINE

Since the 17th century when early European explorers learned tobacco usage from

Indians of the Americas, the habitual nature of tobacco has been recognized. Attempts to

prohibit tobacco usage in various societies have been unsuccessful; no society ever

experiencing the use of tobacco has abandoned its practice.

Smoking cigarettes is one method of consuming tobacco. Some individuals smoke

cigars and pipes; others chew tobacco leaves or inhale tobacco dust. Regardless of the

1
method employed, the drug nicotine enters the body of the consumer. Results of the first

modern medical investigation into the relationship between nicotine and tobacco usage

appeared in the English medical journal Lancet. Dr. Lennox Johnson (1942) reported on

giving injections of nicotine solution to a group of volunteers. He discovered that smokers

found the situation pleasant and were disinclined to smoke for a time thereafter. Dr.

Johnson concluded that "smoking tobacco is essentially a means of administering nicotine,

just as smoking opium is a means of administering morphine".

Further evidence resulted from an experiment conducted by Drs. Finnegan, Larson,

and Haag (1945) of the Medical College of Virginia. They secured a supply of cigarettes

identical in all respects except for nicotine content. A group of volunteer smokers were

then freely issued the cigarettes in carton lots. The first cartons distributed contained high

nicotine cigarettes. After a period of time the distribution was abruptly changed to cartons

of lower nicotine cigarettes, and later, switched back to the originals without warning. The

researchers found that three-fourths of the smokers experienced anxieties during the

period of lower nicotine cigarettes, and many participants abandoned the experiment for

that reason.

In a Swedish study, Drs. Ejrupt and Wikander (1959) gave subjects injections of

nicotine over a period of time. The smokers were observed to either smoke very little or

abstain completely on the days they received injections.

Each of these studies was tarnished because the participants were aware of the

purpose of the experimentation. However, Drs. Lucchesi, Schuster, and Emley (1967) of

the University of Michigan Medical School conducted a methodologically sound

experiment which produced parallel results. Each participant in this study spent six hours

daily for fifteen consecutive days in a soundproof, air conditioned isolation booth receiving

continuous intravenous injections. Sometimes ordinary salt water and other times a

2
nicotine solution was administered. The subjects were allowed to engage in any quiet

activity they chose and, other than the existence of an ashtray, there was no indication of

the purpose of the experiment. The subjects were observed to smoke fewer cigarettes and

to leave significantly longer butts when the nicotine solution was administered.

Dr. M.A. Hamilton Russell (1971) reported in the British Journal of Medical Psychology

that:

We can no longer afford to regard cigarette smoking as a minor vice. It is neither

minor, nor a vice, but a psychological disorder of a particularly refractory nature
and all the evidence places it fair and square in the category of the dependence
disorders. Its management and control is no less pressing than that of other
dependence-producing substances. Indeed, the effective control of cigarette
smoking is potentially the most important health measure that is likely to be open
for us the rest of the century. It is the belief that all dependence disorders may be
in some way related, and that cigarette dependence is an important member of
this group, that has prompted the Addiction Research Unit of the Institute of
Psychiatry, London, to add cigarette smoking to its field of study.

He concluded that the interaction of social and psychological factors determine the onset
of smoking, but once established──smoking is maintained by dependence on the

pharmacological effects of nicotine.

III. THE TOBACCO-HEALTH ISSUE

Medical inquiry has produced other results. The American Cancer Society reported

research in 1949 which indicated a strong statistical relationship between heavy cigarette

smoking and the incidence of lung cancer. These results motivated further research, and

the early 1950s saw the release of several studies reporting that death rates and

occurrences of disease were higher among smokers as compared to nonsmokers. The

cigarette industry was understandably threatened and it reacted in two ways. First, the

3
producers attempted to discredit research findings which linked cigarette smoking to poor
health ── either by criticizing the methodology or presenting contrary evidence. Secondly,

they engaged in advertising to assure the health-conscious consumers that smoking could

be continued in safety.

In addition to the ACS, the leading anti-smoking health interest groups are the

American Lung Association and the American Heart Association.1 These three groups are

unrelenting in their attacks on cigarette consumption. The U.S. Department of Health,

Education & Welfare has played a major role in the cigarette-health issue through its

subsidization and public presentation of medical research. A collaboration among the

Public Health Service, itself a bureau of HEW, and the national health interest groups

resulted in the release of the "Report of the Surgeon General's Advisory Committee on

Smoking and Health" (1964). This Report, submitted by eight prominent M.D.s, a chemist,

and a statistician concluded that "cigarette smoking is a health hazard of sufficient

importance in the United States to warrant appropriate remedial action".

Anti-smoking advocates were thus given a substantive basis on which to argue for

governmental regulation of the cigarette industry.

IV. THEORETICAL MODEL

If cigarette consumption is modeled within neoclassical economic theory, an interesting

choice mechanism obtains. The individual trades-off nicotine, risk, and price when

1 The American Medical Association, although considered a national health interest group, is not
included here because of certain ambiguities in the direction of the group's actions. At certain times the AMA
has attacked, and at other times defended cigarette consumption.

4
evaluating cigarette brands. Consider an established smoker maximizing the following

utility function
U = U[C(n,R,N),m] subject to (1) m + pcC = y, and (2) nC ≥ δN
where,
C ≡ cigarette consumption
n ≡ nicotine content of each cigarette
R ≡ risk evaluation for cigarette consumption
N ≡ pharmocological nicotine dependency
m ≡ composite good consumption
pc ≡ price of cigarettes
y ≡ disposable income
δ ≡ proportion of N which willpower cannot subdue

The individual's choice calculus determines his mix of cigarettes and composite goods.

Risk evaluation is subjective, depending on personal experience and propaganda. A

smoker, through self-control, may consume less nicotine than his addiction level. Nicotine

dependency has a physiological basis and is also probably an increasing function of

lagged nicotine consumption. The first constraint is the budget identity with the price of
composite goods normalized, and the second is the requirement that the δ-dependency be

satisfied. From the optimization procedure emerges a demand function for cigarettes of

the form
Cd = Cd(n,pc,y,R,N)

which will be examined in the empirical section.2

V. THE TOBACCO INDUSTRY

2 This model could be elaborated with diagrams of the cigarette choice calculus.

5
 M. Shnabel (1972) has argued that the United States cigarette industry is an oligopoly.

There are six producers; these are R.J. Reynolds, Philip Morris, Ligget, Loew's, American,
and Brown & Williamson. The industry is geographically concentrated in three states ──

North Carolina, Kentucky, and Virginia. Moreover, actual manufacturing takes place only in

Winston-Salem, Louisville, and Richmond. Although industry pricing is uniform, nonprice

competition results in a wide variety of cigarette flavors, lengths, nicotine content, and

brands being presented to consumers.

A close relationship exists between the cigarette industry and the agricultural tobacco

industry. 3 The demand for cigarette tobacco is obviously derived from the demand for
cigarettes. The three cigarette producing states also produce cigarette tobacco, along with

Tennessee, South Carolina, Georgia, and Florida. The U.S. Department of Agriculture has

acted as the cartelizing agent of the agricultural tobacco market since the Agricultural

Adjustment Act of 1933. The USDA administers acreage/poundage allotments to restrict

production.

Twenty-four federal congressional districts were considered influenced by tobacco

interests in 1979. The legislators from those districts had been elected for an average of

six terms and held chairmanships on one full committee and twelve sub-committees.4

In 1953, the Tobacco Industry Research Committee was formed by the cigarette
manufacturers and tobacco producers to coordinate their response to the growing number

of health detriment charges. The objective was to keep open the question of

3 Of the total quantity of tobacco cultivated in the United States, over ninety percent is grown
specifically for use in the manufacture of cigarettes. The interdependency of interests is obvious.

4 An updated analysis could show congressional representation and committee memberships.

6
cigarette-health dependence by supporting research to produce counterevidence to

unfavorable findings.

The current successor to the TIRC is the Council for Tobacco Research-USA, which is

funded by the tobacco industry. The Tobacco Institute, founded in 1958 by the cigarette

manufacturers, serves as the propagandizing agent and lobbying organization of tobacco

interests. It has always been managed by seasoned, competent politicians.

The tobacco industry's political organization and strength is well developed. Various

government entities obtain considerable benefit from the existence of the tobacco industry.

The federal government realizes a yearly surplus from the foreign trade of tobacco and

tobacco products; federal, state, and local governments receive substantial revenues from
the taxation of tobacco products──mainly cigarettes.5

VI. REGULATION

When the initial medical research findings appeared in the early 1950s, the cigarette

industry reacted by engaging in the so-called "tar derby". Firms advertised claims of

comparatively lower tar and nicotine content in their products. 6 The Federal Trade

Commission was concerned with these unsubstantiated claims made by manufacturers

and intervened on the basis of false and misleading advertisement. A set of trade rules
were promulgated and voluntary withdrawal of objectionable advertising was urged.

5 Federal and state revenues from cigarette taxation could be integrated via text and tables.

6 The "tar derby" also launched a meteoric increase in the number of filter cigarettes produced. Filters
were propagandized by firms as components of healthful and safe cigarettes. The percentage of cigarette
production accounted for by filter cigarettes has increased from six-tenths of one percent in 1950 to
ninety-one percent in 1978.

7
Producers were generally recalcitrant until 1960 when the "tar derby" was discontinued by

a collective cigarette industry action.

From then until the Surgeon General's Report in 1964, the cigarette industry enjoyed a

relatively peaceful existence. The FTC then renewed its attack on advertising with more

vigor, proposing stricter trade regulations and indicating their intention to enforce them.

The tobacco industry responded by contesting the FTC's jurisdiction and legal authority in

the matter. Supporting the tobacco interests were, among others, the Advertising

Federation of America, the Television Bureau of Advertising, the Radio Advertising

Bureau, and the American Newspaper Publishers Association. Congress intervened in the

controversy by passing the Federal Cigarette Labeling and Warning Act of 1965. This act

required that cigarette manufacturers affix health warning labels to product packages.

More importantly, the bill banned FTC rulemaking in the area of smoking for the duration of

the act.

The Federal Communications Commission shocked the tobacco interests in 1965 by

proclaiming that the Fairness Doctrine was applicable in the case of radio and television

cigarette advertising. 7 Stations were required to air anti-smoking commercials to balance

the time allocated to cigarette advertisements. The broadcast and cigarette industries were

indignant over the FCC action but their attempts to nullify it were unsuccessful.
In early 1969 the FTC and FCC announced intentions to ban radio and television

broadcast of cigarette advertising after the expiration of the FCLA Act. Congress acted

quickly to consider additional legislation. The Public Health Smoking Act of 1969 resulted.

7 U.S. Federal Communications Commission, "Memorandum Opinion and Order: Applicability of the
Fairness Doctrine to Cigarette Advertising", (Washington: U.S. Government Printing Office, 1965). The
doctrine requires radio and television stations to provide a cross section of opinion in the station's coverage
of public affairs and matters of public controversy.

8
This bill banned radio and television cigarette advertisements and provided for different

package health warning labels. It also accorded the end of the Fairness Doctrine

imposition and required the FTC to give Congress a six-month notice of any rulemaking

activity concerning cigarettes. Shortly after the passage of the act, the cigarette industry

reached a voluntary agreement with the FTC to list tar and nicotine content in printed

advertising. In 1972 the FTC prompted a manufacturers' agreement to place the package

health warning label in all printed advertisements.

Congress has proven to be the major source of significant regulatory action. This arena

is where the tobacco interest group is politically strongest and, predictably, the cigarette

industry has not opposed any of the regulatory legislation. Such regulation is thus

expected to benefit the industry. However the imposition of the FCC Fairness Doctrine,

because of its effect on the onset of smoking, is expected hurt the industry.

VII. EMPIRICAL MODEL

The empirical model employed to examine the theoretical implications is the following

linear demand equation

PSDCt = β0 + β1 ANCt + β2 RPRICEt + β3 PCRDIt + β4 PSDCt-1 + β5 FCCt-1

+ β6 CLWAt + β7 PHSAt + μt
where, PSDCt ≡ Per-smoker domestic cigarette consumption
(packs)
ANCt ≡ Sales weighted average nicotine content of
cigarettes (milligrams)
RPRICEt ≡ Real sales-weighted mean price per pack of
cigarettes (cents)
PCRDIt ≡ Per-capita real disposable income
PSDCt-1 ≡ One-year lagged PSDC
FCCt-1 ≡ Dummy variable denoting presence of FCC
Fairness

9
 Doctrine imposition (one-year lag)
CLWAt ≡ Dummy variable denoting presence of 1965
Cigarette Labeling & Warning Act
PHSAt ≡ Dummy variable denoting presence of 1969
Public
Health Smoking Act
μt ≡ a random-disturbance term

The eight coefficients are estimated using ordinary least squares on the data presented

in Appendix A. Obviously lacking is a datum proxy for risk evaluation. While the Fairness

Doctrine somewhat captures this idea, perhaps incidence of printed propaganda should be

used explicitly. 8 FCC is lagged in accordance with earlier studies which argued that a
delayed effect characterized the anti-smoking advertisements. The time-series covers the

thirty-one years 1955 through 1985. Actual output and test outcomes are found in

Appendix B. The results obtained were:

PSDCt = 529.4 - 49.18 ANCt - 1.2 RPRICEt - .007 PCRDIt + .45

PSDCt-1
(2.8) (2.1) (2.2) (1.4) (2.2)

- 13.38 FCCt-1 + 36.7 CLWAt - 9.05 PHSAt

(1.03) (1.7) (.7)

R2 = .97 F6,24 = 106

The fit of the regression as measured by R2 and the F-test is excellent. Park-Glejser

tests of each independent variable indicate the absence of heteroskedasticity. The null

hypothesis of the absence of serial correlation is accepted based on Durbin's alternative

test for models with lagged endogenous variable.

8 An index of health/cigarette citations could be generated. Budget sizes of anti-smoking interest

groups could also be used as proxy.

10
 Structural change was examined using a Chow test. The original model could not be

used because of collinearity problems encountered when partitioning the dummy variables

in the data matrix. The model was instead tested without dummy variables, and no change

was determined.

The estimated coefficient for the nicotine content variable is negative and significant at

the .05 level; this finding is consistent with the theoretical implication. It indicates that

smokers, in order to satisfy their pharmacological demand for nicotine, consume more

cigarettes as the nicotine content per cigarette decreases.

Price and income coefficients are small in magnitude and negative in sign. The income

coefficient is insignificant, while that of price holds at the .05 level. This supports the
addiction hypothesis──smokers substitute fewer cigarettes of higher nicotine content when

price increases, but are oblivious to changes in income.

Lagged consumption is significant at the .05 level. Its sign, as theorized, is

positive──indicating that prior period nicotine consumption has a positive effect on the

dependence level.

As expected the coefficient of the dummy regulation variable defining the Fairness

Doctrine imposition was negative. It is not significant at the .05 level; the FCC intervention

perhaps did not injure the cigarette industry.

The coefficient of the CLWA legislated regulation variable is positive but not significant.

This sign supports the contention that legislated regulation is special-interest in nature,

thus benefiting the regulated industry.

The PHSA coefficient is positive but highly insignificant. Indeed, opposing forces are in

effect here. Radio & television advertising was eliminated in trade-off for the industry

benefits. The net effect on consumption is seemingly zero.

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VIII. CONCLUDING COMMENTS

Cigarette smoking is an activity initially undertaken by consumers because of social

and psychological factors, but continued because of the pharmacological effect of nicotine.

The market implications generated from this view have been generally supported by the

empirical results of the econometric model.

Regulation of the cigarette industry has conformed to the expectations of economic

theory. Legislated intervention has been shown to benefit the industry, while damage has

resulted from the action of bureaucratic agencies.

Health interest groups have been concerned with the detrimental effect of cigarette

smoke on the human body. Total particulate matter (tar) and nicotine are generally

considered as the indicators of cigarette danger. Over the years, manufacturers have

lowered the levels of these components in their products. Gori and Lynch (1978), however,

have argued that to measure true cigarette hazard the levels of carbon monoxide, nitrogen

oxide, hydrogen cyanide, and acrolein must also be analyzed. Current research indicates

that of these, only hydrogen cyanide has undergone substantial reduction.

A paradox is discovered: given the addicting nature of nicotine, health interest group

pressure to lower tar and nicotine levels in cigarettes has led smokers to consume a

higher level of contaminants!

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 BIBLIOGRAPHY
L.M. Johnston, "Tobacco Smoking and Nicotine", Lancet, 243, 19 December 1942.

J.K. Finnegan, P.S. Larson, and H.B. Haag, "The Role of Nicotine in the Cigarette
Habit", Science, 102, July 27, 1945, pp. 94-96.

B. Ejrupt and P.A. Wikander, "Försök med Nikotin, Lobelin och Placebo", Svenska
Lakartidningen, 56, July 17, 1959, pp. 2025-2034.

B.R. Lucchesi, C.R. Schuster, and G.S. Emley, "The Role of Nicotine as a
Determinant of Cigarette Smoking Frequency in Man", Clinical Pharmacology and
Therapeutics, 8, 1967, pp. 789-796.

M.A. Hamilton Russell, "Cigarette Smoking: Natural History of a Dependence

Disorder", British Journal of Medical Psychology, 44, 1971, pp. 1-16.

U.S. Department of Health, Education, and Welfare, "Smoking and Health: Report of
the Advisory Committee to the Surgeon General of the Public Health Service",
(Washington: U.S. Government Printing Office, 1964).

M. Shnabel, "An Oligopoly Model of the Cigarette Industry", The Southern Economic
Journal, Vol. XXXVIII, No. 3, January 1972, pp. 325-335.

U.S. Federal Communications Commission, "Memorandum Opinion and Order:

Applicability of the Fairness Doctrine to Cigarette Advertising", (Washington: U.S.
Government Printing Office, 1965). The doctrine requires radio and television stations
to provide a cross section of opinion in the station's coverage of public affairs and
matters of public controversy.

Gio Gori and Cornelius Lynch, "Towards Less Hazardous Cigarettes: Current
Advances", Journal of the American Medical Association, Vol. 240, Number 12, 15
September 1978.

13
 APPENDIX A
Data Set for Empirical Model

YEAR PSDC ANC RPRICE PCRDI LYPSDC FCC CLWA PHSA

──── ───── ───── ────── ──────── ────── ─── ──── ────
1955 401.8 2.660 85.3 9,233.10 391.5 0 0 0
1956 412.3 2.580 84.7 9,331.24 401.8 0 0 0
1957 429.2 2.490 85.9 9,459.77 412.3 0 0 0
1958 457.6 2.220 86.2 9,492.47 429.2 0 0 0
1959 486.4 1.860 85.9 9,922.88 457.6 0 0 0
1960 490.6 1.600 84.5 9,749.14 486.4 0 0 0
1961 508.1 1.560 86.2 9,920.57 490.6 0 0 0
1962 513.8 1.510 84.0 10,108.34 508.1 0 0 0
1963 533.2 1.430 86.1 10,401.40 513.8 0 0 0
1964 520.5 1.320 85.7 10,979.64 533.2 0 0 0
1965 532.5 1.370 88.8 11,277.59 520.5 1 0 0
1966 546.9 1.440 87.1 11,666.65 532.5 1 1 0
1967 554.1 1.420 90.0 11,973.62 546.9 1 1 0
1968 549.0 1.349 87.0 12,145.65 554.1 1 1 0
1969 530.5 1.379 93.2 12,151.94 549.0 1 1 0
1970 528.7 1.311 92.6 12,104.51 530.5 0 1 1
1971 539.0 1.324 90.9 12,189.15 528.7 0 1 1
1972 553.0 1.387 86.7 12,291.19 539.0 0 1 1
1973 578.2 1.323 84.4 12,863.35 553.0 0 1 1
1974 583.3 1.243 82.4 12,611.13 578.2 0 1 1
1975 591.9 1.213 80.8 12,508.03 583.3 0 1 1
1976 593.0 1.161 78.0 12,513.42 591.9 0 1 1
1977 589.5 1.116 80.7 12,577.84 593.0 0 1 1
1978 581.9 1.105 78.7 12,727.55 589.5 0 1 1
1979 585.1 1.067 76.3 13,669.63 581.9 0 1 1
1980 592.2 1.040 73.5 13,641.59 585.1 0 1 1
1981 599.3 0.919 74.1 13,565.50 592.2 0 1 1
1982 593.5 0.900 81.9 13,336.09 599.3 0 1 1
1983 562.6 0.880 91.1 13,585.39 593.5 0 1 1
1984 565.0 0.890 90.6 14,206.58 562.6 0 1 1
1985 561.6 0.960 93.7 14,388.85 565.0 0 1 1

Variable Definitions and Sources

────────────────────────────────

• PSDC ≡ Domestic per-smoker consumption of cigarettes (packs): Economic

Research Service, U.S. Department of Agriculture; Centers for Disease Control, Public
Health Service, U.S. Department of Health & Human Services
• ANC ≡ Sales-weighted mean nicotine content of cigarettes (milligrams): Bureau of
Economics, Federal Trade Commission, U.S. Department of Commerce
• RPRICE ≡ Sales-weighted real mean price of cigarettes (cents per pack): The Tax
Burden on Tobacco, The Tobacco Institute, Volume 22, 1987
• PCRDI ≡ Per-capita real disposable income (dollars): Statistical Abstract of United
States (various volumes), Bureau of Census, U.S. Department of Commerce
• LYPSDC ≡ One-year lag of PSDC
• FCC ≡ Dummy variable denoting existence of FCC "fairness doctrine" imposition
(1965-1969)

14
 • CLWA ≡ Dummy variable denoting existence of Cigarette Labeling & Warning Act of
1965
• PHSA ≡ Dummy variable denoting existence of Public Health Smoking Act of 1969

Note that the GNP price deflator (base year 1982) was used to adjust all nominal dollar figures.

15
 APPENDIX B

Output from LIMDEP Econometric Software

────────────────────────────────────────────

I. OLS Estimate of Model

Dependent Variable.......... PSDC

Number of Observations...... 31.
Mean of Dependent Variable.. 537.55480
Std. Dev. of Dep. Variable.. 54.23874
Std. Error of Regression.... 10.73913
Sum of Squared Residuals.... 2652.6
R - Squared................. .96994
Adjusted R - Squared........ .96080
F-Statistic ( 7, 23)..... 106.03544
Significance of F-Test...... .00000
Log-Likelihood.............. -113.58
Restricted (Slopes=0) Log-L. -167.28
Chi-Squared ( 7)............ 107.41
Significance Level.......... .32173E-13
Durbin - Watson Statistic........... 1.7412
Estimated Autocorrelation (Rho)..... .12938

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE 529.399 188.3 2.812 ( .00990) 1.0000 .00000
ANC -49.1763 23.41 -2.101 ( .04681) 1.4202 .47891
RPRICE -1.20264 .5474 -2.197 ( .03834) 85.068 5.2637
PSRDI -.657632E-02 .4857E-02 -1.354 ( .18887) 11826. 1566.1
LYPSDC .453376 .2060 2.201 ( .03805) 532.07 60.018
FCC [-1] -13.3834 13.02 -1.028 ( .31467) .16129 .37388
PHSA -9.05182 12.67 -.714 ( .48214) .51613 .50800
CLWA 36.7002 21.06 1.742 ( .09482) .64516 .48637

II. Durbin's Alternative Test for Autocorrelation in Models with Lagged Endogenous Variable (when
h-statistic cannot be computed)

Dependent Variable.......... ERR

Number of Observations...... 30.
Mean of Dependent Variable.. .36691
Std. Dev. of Dep. Variable.. 9.33544
Std. Error of Regression.... 10.70556
Sum of Squared Residuals.... 2406.8
R - Squared................. .04771
Adjusted R - Squared........ -.31507
F-Statistic ( 8, 21)..... .13151

16
Significance of F-Test...... .99695
Log-Likelihood.............. -109.19
Durbin - Watson Statistic........... 2.1600
Estimated Autocorrelation (Rho)..... -.80000E-01

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE -18.8981 188.8 -.100 ( .92120) 1.0000 .00000
ANC 5.10589 23.93 .213 ( .83307) 1.3789 .42719
RPRICE -.787972E-02 .5458 -.014 ( .98862) 85.061 5.3535
PSRDI .259882E-02 .5293E-02 .491 ( .62851) 11912. 1515.8
LYPSDC -.301435E-01 .2110 -.143 ( .88779) 536.75 54.978
FCC [-1] 2.49710 13.31 .188 ( .85293) .16667 .37905
CLWA -6.07347 21.88 -.278 ( .78402) .66667 .47946
PHSA 3.31918 13.13 .253 ( .80284) .53333 .50742
L1ERR .202508 .2605 .777 ( .44566) -.10014 9.5471
└─ insignificant

17
III. Park-Glejser Test for Heteroskedasticity - ANC Variable

Dependent Variable.......... LogSQERR

Number of Observations...... 31.
Mean of Dependent Variable.. 3.14294
Std. Dev. of Dep. Variable.. 2.04649
Std. Error of Regression.... 2.02956
Sum of Squared Residuals.... 119.45
R - Squared................. .04926
Adjusted R - Squared........ .01647
F-Statistic ( 1, 29)..... 1.50248
Significance of F-Test...... .23015
Log-Likelihood.............. -64.930
Restricted (Slopes=0) Log-L. -65.687
Chi-Squared ( 1)............ 1.5149
Significance Level.......... .21839
Durbin - Watson Statistic........... 2.0262
Estimated Autocorrelation (Rho)..... -.13119E-01

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE 2.68306 .5231 5.129 ( .00002) 1.0000 .00000
LogANC 1.51238 1.234 1.226 ( .23015) .30408 .30032
└─ insignificant

IV. Park-Glejser Test for Heteroskedasticity - RPRICE Variable

Dependent Variable.......... LogSQERR

Number of Observations...... 31.
Mean of Dependent Variable.. 3.14294
Std. Dev. of Dep. Variable.. 2.04649
Std. Error of Regression.... 2.00600
Sum of Squared Residuals.... 116.70
R - Squared................. .07120
Adjusted R - Squared........ .03917
F-Statistic ( 1, 29)..... 2.22315
Significance of F-Test...... .14675
Log-Likelihood.............. -64.568
Restricted (Slopes=0) Log-L. -65.687
Chi-Squared ( 1)............ 2.2388
Significance Level.......... .13458
Durbin - Watson Statistic........... 1.9480
Estimated Autocorrelation (Rho)..... .25999E-01

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE -35.3633 25.83 -1.369 ( .18145) 1.0000 .00000

18
LogRPRICE 8.66955 5.814 1.491 ( .14675) 4.4416 .62988E-01
└─ insignificant

19
V. Park-Glejser Test for Heteroskedasticity - PSRDI Variable

Dependent Variable.......... LogSQERR

Number of Observations...... 31.
Mean of Dependent Variable.. 3.14294
Std. Dev. of Dep. Variable.. 2.04649
Std. Error of Regression.... 2.00278
Sum of Squared Residuals.... 116.32
R - Squared................. .07418
Adjusted R - Squared........ .04226
F-Statistic ( 1, 29)..... 2.32375
Significance of F-Test...... .13824
Log-Likelihood.............. -64.518
Restricted (Slopes=0) Log-L. -65.687
Chi-Squared ( 1)............ 2.3386
Significance Level.......... .12621
Durbin - Watson Statistic........... 2.0533
Estimated Autocorrelation (Rho)..... -.26674E-01

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE 41.4210 25.11 1.649 ( .10986) 1.0000 .00000
LogPSRDI -4.08552 2.680 -1.524 ( .13824) 9.3692 .13643
└─ insignificant

VI. Park-Glejser Test for Heteroskedasticity - LYPSDC Variable

Dependent Variable.......... LogSQERR

Number of Observations...... 31.
Mean of Dependent Variable.. 3.14294
Std. Dev. of Dep. Variable.. 2.04649
Std. Error of Regression.... 2.04967
Sum of Squared Residuals.... 121.83
R - Squared................. .03032
Adjusted R - Squared........ -.00312
F-Statistic ( 1, 29)..... .90679
Significance of F-Test...... .34884
Log-Likelihood.............. -65.235
Restricted (Slopes=0) Log-L. -65.687
Chi-Squared ( 1)............ .90353
Significance Level.......... .34184
Durbin - Watson Statistic........... 2.0067
Estimated Autocorrelation (Rho)..... -.33545E-02

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE 21.6088 19.40 1.114 ( .27437) 1.0000 .00000
LogLYPSD -2.94510 3.093 -.952 ( .34884) 6.2700 .12100

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│
└─ insignificant

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VII. Chow Test for Structural Change

F21,5 ≈ 3085.4 - 1903.61 ⋅ 31 - 10 = 2.61 1903.61 5

Table Value for F21,5 @ 5% is 2.68

Therefore, null hypothesis that restricted & unrestricted models are identical cannot be rejected.

Restricted Regression:

Dependent Variable.......... PSDC

Number of Observations...... 31.
Mean of Dependent Variable.. 537.55480
Std. Dev. of Dep. Variable.. 54.23874
Std. Error of Regression.... 10.89354
Sum of Squared Residuals.... 3085.4 ───── *
R - Squared................. .96504
Adjusted R - Squared........ .95966
F-Statistic ( 4, 26)..... 179.42685
Significance of F-Test...... .00000
Log-Likelihood.............. -115.52
Restricted (Slopes=0) Log-L. -167.28
Chi-Squared ( 4)............ 103.52
Significance Level.......... .32173E-13
Durbin - Watson Statistic........... 1.5380
Estimated Autocorrelation (Rho)..... .23102

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE 259.517 115.3 2.251 ( .03309) 1.0000 .00000
ANC -17.7579 16.20 -1.096 ( .28310) 1.4202 .47891
PSRDI .644646E-03 .2860E-02 .225 ( .82343) 11826. 1566.1
RPRICE -.970220 .4432 -2.189 ( .03777) 85.068 5.2637
LYPSDC .710756 .1462 4.860 ( .00005) 532.07 60.018

Unrestricted Regression (1st Sixteen Observations):

Dependent Variable.......... PSDC

Number of Observations...... 16.
Mean of Dependent Variable.. 499.71000
Std. Dev. of Dep. Variable.. 49.35386
Std. Error of Regression.... 11.43293
Sum of Squared Residuals.... 1437.8 ───── *
R - Squared................. .96065
Adjusted R - Squared........ .94634
F-Statistic ( 4, 11)..... 67.13092
Significance of F-Test...... .00000
Log-Likelihood.............. -59.187

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Restricted (Slopes=0) Log-L. -84.587
Chi-Squared ( 4)............ 50.801
Significance Level.......... .53108E-13
Durbin - Watson Statistic........... 1.9350
Estimated Autocorrelation (Rho)..... .32475E-01

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE 444.990 298.1 1.493 ( .16364) 1.0000 .00000
ANC -48.9692 36.64 -1.336 ( .20838) 1.7187 .48484
RPRICE -1.28967 2.192 -.588 ( .56810) 87.074 2.7304
PSRDI .641877E-02 .1274E-01 .504 ( .62428) 10620. 1113.9
LYPSDC .372634 .4669 .798 ( .44174) 491.13 55.511

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 Unrestricted Regression (Last Fifteen Observations):

Dependent Variable.......... PSDC

Number of Observations...... 15.
Mean of Dependent Variable.. 577.92258
Std. Dev. of Dep. Variable.. 17.64558
Std. Error of Regression.... 6.82505
Sum of Squared Residuals.... 465.81 ───── *
R - Squared................. .89314
Adjusted R - Squared........ .85040
F-Statistic ( 4, 10)..... 20.89527
Significance of F-Test...... .00008
Log-Likelihood.............. -47.593
Restricted (Slopes=0) Log-L. -63.841
Chi-Squared ( 4)............ 32.497
Significance Level.......... .30530E-07
Durbin - Watson Statistic........... 2.1149
Estimated Autocorrelation (Rho)..... -.57460E-01

Variable Coefficient Std. Error T-ratio (Sig.Lvl) Mean of X Std.Dev.of X

------------------------------------------------------------------------------
ONE 182.312 220.2 .828 ( .42708) 1.0000 .00000
ANC 44.3913 32.13 1.381 ( .19722) 1.1019 .17092
RPRICE -1.27635 .4184 -3.051 ( .01224) 82.929 6.4717
PSRDI .779451E-02 .5772E-02 1.350 ( .20669) 13112. 701.74
LYPSDC .608523 .1903 3.198 ( .00953) 575.73 21.449

24