Tuesday, July 17, 2007

Does Giffen behavior exist in reality?

Update: somehow I forgot that the Giffen thing has been discussed by Aco, more than a year ago. It was in September 2006, just when I arrived back in Jakarta. Maybe that's why I forgot to refer to it.

In every college-level microeconomics textbook, there is always a discussion on a special circumstance when the demand curve is upward-sloping: the Giffen good. Theoretically, the situation arises when the income effect outweighs the substitution effect under a price change.

A good can be a Giffen one if it is a basic commodity that makes up a large portion of a poor's income. The term was named after Sir Robert Giffen, a Victorian-era British economist, who argued that potatoes during the Irish potato famine fit this bill for the starving Irish:
Since potatoes already made up the bulk of their diet and consumed most of their income, as prices rose due to the potato shortages, what little discretionary money they had for meat and other food disappeared. No longer left with enough for even morsels of meat, the peasants desperately threw their remaining pennies back at the potato vendors for a few more spuds, thus driving prices of the scarce commodity up still further (a summary from The Nation).
If it's still hard for you to imagine the situation, consider Dani Rodrik's opposite illustration when the price declines instead of increases:
Imagine a very poor household who spend a very large part of its income on some subsistence commodity such as rice. Now suppose that the price of rice goes down for some reason. How does the household alter its pattern of consumption? One response is to increase consumption of rice at the expense of other things because rice is now cheaper. This is the standard substitution effect that ensures demand curves are downward sloping. But another is that the household's overall purchasing power--its real income--has increased and therefore the family may choose to consume things, such as meat, that richer families tend to consume. If this decrease in demand for rice outweighs the substitution effect, we have a Giffen good. Put differently, the lower price of rice allows the family to satisfy its nutritional needs by a tastier combination of products, one that relies less on rice and more on meat.
The question is, does a Giffen good exist in reality? No one is quite sure. Even Sir Giffen's argument was based on speculation instead of empirical evidence.

A recent paper by Harvard's Nolan Miller and Robert Jensen (was at Harvard, now at Brown; I happened to took their classes) claimed to be the 'first, rigorous empirical evidence of the existence of Giffen behavior. ' (Note: The authors preferred to use the term 'Giffen behavior' instead of 'Giffen good' since, as they wrote, "it is not the good that is Giffen, but the consumers’ behavior").

They ran a field experiment in the Hunan and Gansu provinces of China, in which they randomly subsidized households’ primary dietary staple (rice in Hunan and wheat flour in Gansu). As the prices of staples are cheaper, they observed a strong evidence of Giffen behavior with respect to rice in the Hunan province. They also found a less clear evidence of Giffen behavior in Gansu with respect to wheat.

They have an interesting way to begin the conclusion section in the paper:
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.


  1. I thought Roger Koenker was the first. It was fun to learn from him.

  2. Ah, yes.. I guess it's about 'claim', right? Miller-Jensen claimed the paper to be the 'first rigorous evidence' of the existence of Giffen behavior. Not the 'first attempt.'

    But did Koenker really show that bread was indeed Giffen? I thought he concluded that it was not the case, no?

  3. You're right. Koenker found no evidence that bread was Giffen. And being his student, I lost faith in Giffen :-) Well I'll read Jensen's stuff, maybe I'll change my mind :-)