Regulatory Policy When Behavior is Addictive: Smoking,Cigarette Taxes and Bootlegging

Abstract

Regulatory policy generally offers three policy instruments-command and control regulation, incentives, and information-yet efforts to test the comparative effectiveness of these instruments have been lacking. Using a simple theory derived from the economics of supply and demand, this study presents a hypothesis that information policies will interact with incentives and lessen their impact. If incentives policies are not uniform across the nation, they can also create compliance problems. These hy potheses are tested with pooled data set on cigarette regulation. While both information policies and incentives are effective at reducing cigarette consumption, they interact so that the total impact is less than the sum of the individual effects. State tax rates also interact with each other creating the incentive to avoid compliance by bootlegging cigarettes.