Question

A dataset includes 3 potential instruments: cigtax (the cigarette tax per pack levied in the state in 2000), unemployment (=1 if currently unemployed involuntarily); and sepdv (=1 if individual is separated or divorced). Discuss intuitive/theoretical reasons why these may be good instruments in first stage for smoking.

Answer 1

The dataset contains cigtax, unemployment and sepdv, let's discuss each one by one.

1. cigtax - It is the tax levied on cigarettes in the state in 2000, this surely affects the consumption of cigarettes. The increases in tobacco taxes decrease tobacco use. Indeed, raising taxes on tobacco and thereby increasing its price is one of the most effective ways to reduce tobacco use. Prices affect virtually all measures of cigarette use, including per-capita consumption, smoking rates, and the number of cigarettes smoked daily. These effects apply across a wide range of racial and socioeconomic groups.

Hence, cigtax is a good instrument in the first stage of smoking as a person who wants to start smoking would consider the price of it.

2. Unemployment - Studies in the United States and Europe have found higher smoking prevalence among unemployed job seekers relative to employed workers. While consistent, the extant epidemiologic investigations of smoking and work status have been cross-sectional, leaving it underdetermined whether tobacco use is a cause or effect of unemployment.

It is clear that unemployed individuals are more likely to start smoking as they can face stress of finding a job and hence, unemployment is a good instrument in the first stage of smoking.

3. sepdv - An individual who is separated or divorced are more likely to start smoking in an effort to escape the stresses of your current situation. There is no causation between starting to smoke and divorces but separated people are more likely to start smoking and that is why this is a good instrument in the first stage of smoking.

sepdv = 1(divorced or separated)

sepdv = 0(others)