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Subsistence and substitutability in consumer preferences

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  • Stefan Baumgaertner

    ()
    (Sustainability Economics Group, Leuphana University of Lueneburg, Germany)

  • Moritz A. Drupp

    (Department of Geography and Environment, London School of Economics and Political Science, UK and Department of Economics, University of Kiel, Germany)

  • Martin F. Quaas

    (Department of Economics, University of Kiel, Germany)

Abstract

We propose a formal description of individual preferences that captures a subsistence requirement in consumption in an otherwise standard constant-elasticity-ofsubstitution (CES) utility specification. We study how substitutability between the subsistence good and another good depends on the subsistence requirement and the level of consumption of the two goods. We find that the Hicksian elasticity of substitution is zero below the subsistence consumption level, and approaches the standard non-subsistence CES value as consumption of the subsistence good goes to infinity. Above the subsistence threshold, it strictly monotonically increases with income. Whether the two goods are market substitutes or complements depends on, besides the CES-substitutability parameter, the level of income and the subsistence requirement. Our result that with a subsistence requirement substitutability between different consumption goods is nonconstant but increases with individual income has important implications for growth, development and environmental policy.

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Bibliographic Info

Paper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 290.

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Length: 28 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:lue:wpaper:290

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Related research

Keywords: subsistence in consumption; substitutability; Hicksian elasticity of substitution; Stone-Geary function;

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  1. Kraay, Aart & Raddatz, Claudio, 2005. "Poverty traps, aid, and growth," Policy Research Working Paper Series 3631, The World Bank.
  2. Blackorby, Charles & Boyce, Richard & Russell, R Robert, 1978. "Estimation of Demand Systems Generated by the Gorman Polar Form: A Generalization of the S-Branch Utility Tree," Econometrica, Econometric Society, vol. 46(2), pages 345-63, March.
  3. Stern, David I, 2008. "Elasticities of Substitution and Complementarity," MPRA Paper 12454, University Library of Munich, Germany.
  4. Ravn, Morten O. & Schmitt-Grohé, Stephanie & Uribe, Martín, 2008. "Macroeconomics Of Subsistence Points," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 136-147, April.
  5. Paolo Bertoletti, 2005. "Elasticities of Substitution and Complementarity: A Synthesis," Journal of Productivity Analysis, Springer, vol. 24(2), pages 183-196, October.
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  8. Matsuo, Miki & Tomoda, Yasunobu, 2012. "Human capital Kuznets curve with subsistence consumption level," Economics Letters, Elsevier, vol. 116(3), pages 392-395.
  9. John C. V. Pezzey & John M. Anderies, 2002. "The Effect of Subsistence on Collapse and Institutional Adaptation in Population-resource Societies," Economics and Environment Network Working Papers 0201, Australian National University, Economics and Environment Network.
  10. Alkire, Sabina, 2002. "Dimensions of Human Development," World Development, Elsevier, vol. 30(2), pages 181-205, February.
  11. Sterner, Thomas & Persson, U. Martin, 2007. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Discussion Papers dp-07-37, Resources For the Future.
  12. Sharif, Mohammed, 1986. "The Concept and measurement of subsistence: A survey of the literature," World Development, Elsevier, vol. 14(5), pages 555-577, May.
  13. Garner, Phillip, 2010. "A note on endogenous growth and scale effects," Economics Letters, Elsevier, vol. 106(2), pages 98-100, February.
  14. Manuel Frondel, 2011. "Modeling Energy and Non-energy Substitution – A Survey of Elasticities," Ruhr Economic Papers 0256, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
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