Subsistence and substitutability in consumer preferences
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. M. Solow, 1974.
"Intergenerational Equity and Exhaustible Resources,"
Review of Economic Studies,
Oxford University Press, vol. 41(5), pages 29-45.
- R. M. Solow, 1973. "Intergenerational Equity and Exhaustable Resources," Working papers 103, Massachusetts Institute of Technology (MIT), Department of Economics.
- Pezzey, John C. V. & Anderies, John M., 2003. "The effect of subsistence on collapse and institutional adaptation in population-resource societies," Journal of Development Economics, Elsevier, vol. 72(1), pages 299-320, October.
- 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.
- Kraay, Aart & Raddatz, Claudio, 2007. "Poverty traps, aid, and growth," Journal of Development Economics, Elsevier, vol. 82(2), pages 315-347, March.
- Kraay, Aart & Raddatz, Claudio, 2005. "Poverty traps, aid, and growth," Policy Research Working Paper Series 3631, The World Bank.
- Thomas Sterner & U. Martin Persson, 2008. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 61-76, Winter.
- 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.
- 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 345-363, March.
- David Stern, 2011. "Elasticities of substitution and complementarity," Journal of Productivity Analysis, Springer, vol. 36(1), pages 79-89, August.
- David I. Stern, 2004. "Elasticities of Substitution and Complementarity," Rensselaer Working Papers in Economics 0403, Rensselaer Polytechnic Institute, Department of Economics.
- Stern, David I, 2008. "Elasticities of Substitution and Complementarity," MPRA Paper 12454, University Library of Munich, Germany.
- P. A. Samuelson, 1947. "Some Implications of "Linearity."," Review of Economic Studies, Oxford University Press, vol. 15(2), pages 88-90.
- Brown, Murray & Heien, Dale M, 1972. "The S-Branch Utility Tree: A Generalization of the Linear Expenditure System," Econometrica, Econometric Society, vol. 40(4), pages 737-747, July.
- Garner, Phillip, 2010. "A note on endogenous growth and scale effects," Economics Letters, Elsevier, vol. 106(2), pages 98-100, February.
- 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.
- Matsuo, Miki & Tomoda, Yasunobu, 2012. "Human capital Kuznets curve with subsistence consumption level," Economics Letters, Elsevier, vol. 116(3), pages 392-395.
- Alkire, Sabina, 2002. "Dimensions of Human Development," World Development, Elsevier, vol. 30(2), pages 181-205, February.
- Sharif, Mohammed, 1986. "The Concept and measurement of subsistence: A survey of the literature," World Development, Elsevier, vol. 14(5), pages 555-577, May.
- Steger, Thomas M., 2000. "Economic growth with subsistence consumption," Journal of Development Economics, Elsevier, vol. 62(2), pages 343-361, August.
- Paolo Bertoletti, 2005. "Elasticities of Substitution and Complementarity: A Synthesis," Journal of Productivity Analysis, Springer, vol. 24(2), pages 183-196, October. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:lue:wpaper:290. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Wagner)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.