Academic journal article Economic Inquiry

Focusing the Search for Giffen Behavior

Academic journal article Economic Inquiry

Focusing the Search for Giffen Behavior

Article excerpt

I. INTRODUCTION

In the neoclassical theory of consumer choice, Giffen behavior can exist only if a positive income effect outweighs an always-negative substitution effect. It is a phenomenon, then, associated with highly restrictive--and, therefore, unlikely--characteristics of the consumer's utility function. Over the years there have been numerous attempts to uncover goods that are likely to give rise to such functions, with mixed results. A recent experiment by Battalio et al. |1991~ shows that some animals demonstrate Giffen behavior and suggests that economic theory must accommodate, not abandon, the phenomenon, despite "the very small likelihood of its existence". One difficulty with finding empirical examples of Giffen behavior in humans is that the neoclassical model provides few clues for locating either goods or individuals where the behavior is likely to be seen. Under what circumstances can one expect to observe not only positive income effects but also positive income effects that swamp substitution effects? Hicks |1956, 65~ argued that, for a good to be Giffen, a high proportion of the consumer's income has to be spent on it. Ng |1972~ suggested looking for this where consumers engage in stepwise optimization, with income being distributed initially among categories of goods, along lines first proposed by Strotz |1957~. While the proportion of the consumer's income spent on a good may be low, the proportion of the expenditure assigned to each category could be high, increasing the likelihood of observing the Giffen phenomenon. This suggestion may help to narrow the search but, at least so far, it has provided no guidance for how to select either categories or goods to look at for Giffen behavior. Thus Giffen goods continue to be viewed as theoretically possible but empirically unlikely.

In a recent article, Gilley and Karels |1991~ develop a convincing argument to explain Giffen behavior as a consequence not of preference characteristics but, rather, of a constraint on behavior: in particular, a nutrition constraint. Their results lead them to conclude that "the most likely place...to look for Giffen behavior...would be among the very poor, consuming a few staple items with limited substitution possibilities". Here, then, is a concrete guide for empirical discovery of the phenomenon, although they endorse the view that the behavior is probably rare.

The purpose of this note is to demonstrate that Giffen behavior may be a much more pervasive phenomenon than commonly believed, and we suggest where it may be found.(1) We endorse Gilley and Karels's view that consumer choice may be constrained by more than income. We suggest, however, that such additional constraints are as likely to impose upper, as opposed to lower, bounds on consumption. To make this point, we show that Giffen behavior can occur in the Gilley-Karels framework when the consumer has an excess, rather than a shortage, of food. Thus, while Gilley-Karels argue that Giffen behavior is most likely associated with subsistence incomes, we show that it may well be found where income levels are much higher. The Giffen behavior we find appears in the presence of local satiation, a circumstance likely to characterize the demand for some foods or goods. Whether viewed as a plausible characteristic of preferences, independent of specific functional form, or as a second constraint on choice, recognizing its presence in many choice circumstances helps us to focus the search for Giffen behavior.(2) Other examples of additional upper constraints on consumer choice include time-constrained decision-making as developed by Becker |1965~ and points rationing, considered by Scitovsky |1942~, Tobin |1952~, Goldfarb |1977~, and Wichers |1979~; and these too are promising areas to search for Giffen behavior. II. ADDITIONAL CONSTRAINTS ON CONSUMER CHOICE: UPPER VS. LOWER BOUNDS

In the Gilley-Karels model, the consumer seeks to maximize satisfaction from bundles of food, subject to two constraints: budget and subsistence. …

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