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Subsistence and substitutability in consumer preferences

Author

Listed:
  • 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.

Suggested Citation

  • Stefan Baumgaertner & Moritz A. Drupp & Martin F. Quaas, 2013. "Subsistence and substitutability in consumer preferences," Working Paper Series in Economics 290, University of Lüneburg, Institute of Economics.
  • Handle: RePEc:lue:wpaper:290
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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