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Unformatted text preview: 1553 American Economic Review 2008, 98:4, 1553–1577 http://www.aeaweb.org/articles.php?doi = 10.1257/aer.98.4.1553 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 the Law 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 of money 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 supporting Marshall’s conjec- ture. 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 support the claim, but at a more basic level it is unlikely that consumption of potatoes could 1 We use the term “Giffen behavior” rather than “Giffen good” to emphasize that the Giffen property is one that holds for particular consumers 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. 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, we find 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 important for the effective design of welfare programs for the poor. ( JEL D12, O12) * Jensen: Watson Institute for International Studies, Brown University, 111 Thayer St., Providence, RI 02912, and National Bureau of Economic Research (e-mail: [email protected]); Miller: John F. Kennedy School of and National Bureau of Economic Research (e-mail: [email protected]...
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This note was uploaded on 04/12/2009 for the course HKS API111 taught by Professor Avery during the Fall '08 term at Harvard.
- Fall '08