In Search of Giffen Behavior

Abstract

This paper develops a theory of Giffen behavior that resultsfrom a second rationing constraint. In contrast to standard analysis, this approach is virtually independent of the spec@ form of consumer preferences. The effect isfirst developed in a two-good world along with an example, then extended to a more general case to determine if the effect vanishes as the choice set is expanded. The results demonstrate that Giffen behavior is plausible when a second rationing constraint applies and, furthermore, adding additional goods to the choice set does not necessarily cause the effect to vanish.

A difficulty in the search for Giffen behavior

“…For example, one might imagine X to be green vegetables although Gilley and Karels [1991] do not offer this interpretation. Thus, Gilley and Karels [1991] claim, in essence, that the food which provides the most calories per dollar spent must be a Giffen good. In their words [p. 186], "the good most efficient in providing subsistence exhibits Giffen characteristics."…”

“…Assuming that both constraints are binding, they show that M and S are chosen independently of the utility function since the two binding linear constraints in two unknowns uniquely determine both M and S. Gilley and Karels [1991] also state a condition on the prices and calorie contents of the two goods such that S is inferior and Giffen. Hence, they suggest that empirical searches for Giffen goods focus on cases where two goods are chosen subject to two binding constraints.…”

“…Recently, Gilley and Karels [1991] have analyzed Giffen behavior for a household whose choices of meat, M, and potatoes (spuds), S, are restricted by both a money income constraint and a minimum calorie constraint. Assuming that both constraints are binding, they show that M and S are chosen independently of the utility function since the two binding linear constraints in two unknowns uniquely determine both M and S. Gilley and Karels [1991] also state a condition on the prices and calorie contents of the two goods such that S is inferior and Giffen.…”

“…After examining the two-good case, Gilley and Karels [1991] introduce a third good, X, into their analysis. With this addition to the model, the budget and calorie constraints become:…”

Generalized marginal rate of substitution in multiconstraint consumer’s problems and their reciprocal expenditure problems

“…Shefrin and Heineke (1979); Cornes and Milne (1989) also analyze models with incomplete securities markets in a multiple constraint setting. The list of applications of models with multiple constraints would include the demand of foods subject to the standard budget constraint as well as to dietary requirements such as a minimum or maximum intake of calories, Gilley and Karels (1991); the impure public goods model, Cornes and Sandler (1984); the analysis of own substitution effects, inferior goods or Giffen behavior, (Lancaster 1968;Lipsey and Rosenbluth 1971;Johnson and Larson 1994). Chapter 7 of Cornes (1992) provides a number of examples and references for applications of the multiple constraint setting.…”