THE DEMAND FOR CIGARETTE SMUGGLING

When taxes raise the full price of a good above that in nearby jurisdi ctions consumers have an incentive to cross into the lower-price juris diction to make purchases. Using a simple microeconomic model of the c onsumer's border-crossing decision, we derive an econometric model to test the significance of border crossing and estimate the magnitude of the resulting sales. Examining cigarette sales in the continental U.S . over the period 1960 to 1986, we find strong evidence that border cr ossing is a significant factor in explaining sales differentials betwe en states. Implications for demand estimation and excise tax policy ar e discussed.