American Economic Review 2008, 98:4, 1553–1577 http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.4.1553
Giffen Behavior and Subsistence Consumption
By Robert T. Jensen and Nolan H. Miller*
This paper provides the first real-world evidence of Giffen behavior, i.e., upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, wefind strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu. The data provide new insight into the consumption behavior of the poor, who act as though maximizing utility subject to subsistence concerns. We find that their elasticity of demand depends significantly, and nonlinearly, on the severity of their poverty. Understanding this heterogeneity is importantfor the effective design of welfare programs for the poor. (JEL D12, O12)
The “Law of Demand,” which holds that as the price of a good increases, consumers’ demand for that good should decrease, is one of the bedrock principles of microeconomics. Economists have long recognized, however, that the axioms of consumer theory do not guarantee that demand curves must slope downward, and that theLaw of Demand, while descriptively valid in many situations, may not apply to very poor consumers facing subsistence concerns. Alfred Marshall first publicized this idea in the 1895 edition of his Principles of Economics: As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility ofmoney to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it (208). Since Marshall’s time, a discussion of “Giffen” behavior has found its way into virtually every basic economics course, despite a lack of real-world evidence supportingMarshall’s conjecture.1 Studies by George J. Stigler (1947) and Roger Koenker (1977) argue that demand for neither bread nor wheat was upward sloping in Britain during Marshall’s time. The standard textbook example of a Giffen good, potatoes during the Irish Potato Famine of 1845–1849 (Paul A. Samuelson 1964), has also been discredited (Sherwin Rosen 1999). Not only are there no data to supportthe claim, but at a more basic level it is unlikely that consumption of potatoes could
* Jensen: Watson Institute for International Studies, Brown University, 111 Thayer St., Providence, RI 02912, and National Bureau of Economic Research (e-mail: firstname.lastname@example.org); Miller: John F. Kennedy School of Government, Harvard University, 79 JFK St., Cambridge, MA 02138 (e-mail:email@example.com). We thank Alberto Abadie, Chris Avery, Sebastian Bauhoff, Amitabh Chandra, Suzanne Cooper, Daniel Hojman, Brian Jacob, Elizabeth Lacey, Erzo Luttmer, Mai Nguyen, Albert Park, Rodrigo Wagner, Sangui Wang, Richard Zeckhauser, and two anonymous referees for valuable comments and discussions, and Frank Mou, Dulles Wang, and Fan Zhang for research assistance. We gratefully acknowledge financialsupport from the National Institute of Aging, the William F. Milton Fund at the Harvard Medical School, the Dean’s Research Fund at the John F. Kennedy School of Government, the Center for International Development at Harvard University, and the Hefner China Fund. 1 We use the term “Giffen behavior” rather than “Giffen good” to emphasize that the Giffen property is one that holds for particularconsumers in a particular situation and therefore depends on, among other things, prices and wealth. Thus, it is not the good that is Giffen, but the consumers’ behavior. 1553
THE AmERICAN ECONOmIC REVIEW
have increased when the price rose during the famine, at least in the aggregate, precisely because the price rise was caused by a blight that destroyed much of...
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