Wednesday, July 18, 2007

A Real World Giffen Good

Chapter 21 of my favorite economics textbook has a brief discussion of Giffen goods--goods for which a lower price decreases the quantity demanded. This occurs when a negative income effect (the good is inferior) exceeds the substitution effect.

Do such goods ever exist? A new study by Robert Jensen and Nolan Miller, economists at Harvard's Kennedy School, answers this question in the affirmative:

we conducted a field experiment in which for five months, randomly selected households were given vouchers that subsidized their purchases of their primary dietary staple. Building on the insights of our earlier analysis, we studied two provinces of China: Hunan in the south, where rice is the staple good, and Gansu in the north, where wheat is the staple. Using consumption surveys gathered before, during and after the subsidy was imposed, we find strong evidence that poor households in Hunan exhibit Giffen behavior with respect to rice. That is, lowering the price of rice via the experimental subsidy caused households to reduce their demand for rice, and removing the subsidy had the opposite effect. This finding is robust to a range of alternative specifications and methods of parsing the data. In Gansu, the evidence is somewhat weaker, and relies to a greater extent on segregating households that are poor from those that are too poor or not poor enough. We attribute the relative weakness of the case for Giffen behavior in Gansu to the partial failure of two of the basic conditions under which Giffen behavior is expected; namely that the staple good have limited substitution possibilities, and that households are not so poor that they consume only staple foods. Focusing our analysis on those whom the theory identifies as most likely to exhibit Giffen behavior, we find stronger evidence of its existence....

To the best of our knowledge, this is the first rigorous empirical evidence of Giffen behavior. It is ironic that despite a long search, in sometimes unusual settings, we found examples in the most widely consumed foods for the most populous nation in the history of humanity.

A good example for the next edition.