Giffen Behavior: Theory and Evidence
AbstractThis paper provides the first rigorous, empirical evidence of the existence of Giffen behavior, i.e., a situation in which consumers respond to an increase in the price of a good by demanding more of it. We begin by examining several theoretical approaches to the Giffen phenomenon and show that in each case Giffen behavior is closely associated with poor consumers’ need to maintain subsistence consumption in the face of an increase in the price of a staple commodity. We then present evidence on the existence of Giffen behavior among extremely poor households in two provinces of China. In order to obtain an unbiased estimate of the key price elasticity, we conducted a field experiment in which we randomly subsidized households’ primary dietary staple (rice in Hunan province and wheat flour in Gansu province). Using consumption data gathered before, during and after the intervention, we find strong evidence of Giffen behavior with respect to rice in Hunan province. We also find evidence for Giffen behavior in Gansu with respect to wheat; however, the evidence is less robust than for Hunan, due to the (unanticipated) failure of at least two of the theoretical conditions that appear necessary for Giffen behavior. Restricting the Gansu sample to households that meet these conditions provides stronger evidence of Giffen behavior. [This paper replaces RWP02-014 and was revised in December 2007.]
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Bibliographic InfoPaper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-030.
Date of creation: Jun 2007
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Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
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- Gilley, Otis W & Karels, Gordon V, 1991. "In Search of Giffen Behavior," Economic Inquiry, Western Economic Association International, vol. 29(1), pages 182-89, January.
- Richard G. Lipsey & Gideon Rosenbluth, 1971. "A Contribution to the New Theory of Demand: A Rehabilitation of the Giffen Good," Canadian Journal of Economics, Canadian Economics Association, vol. 4(2), pages 131-63, May.
- Charles van Marrewijk & Peter A. G. van Bergeijk, 1990. "Giffen Goods and the Subsistence Level," History of Political Economy, Duke University Press, vol. 22(1), pages 145-148, Spring.
- Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
- Matthew A. Hanson, 2007. "The Economics of Roadside Bombs," Working Papers 68, Department of Economics, College of William and Mary.
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