ALTERNATIVE APPROACHES TO MODELLING ZERO EXPENDITURE: AN APPLICATION TO SPANISH DEMAND FOR TOBACCO*

Abstract The purpose of this paper is to emphasise the importance of double-hurdle models in the estimation of tobacco demand equations. Using data from the Spanish Family Expenditure Survey (EPF), Tobit, P-Tobit and first hurdle dominance models are shown to be restrictive. This dataset also confirms the existence of separate individual decisions on participation and consumption. We propose to estimate a dependent version of a double-hurdle model, although independence is not restrictive once additional powers of total expenditure are included in the specification of the second hurdle. Several misspecification tests are also conducted among the different models.