Canonical Consumer

[From Rick Marken (2002.11.10.1730)]

William Williams wrote:

It may be possible to generate a Giffen effect using the orthodox conception of
economic behavior. See the discussion Ref 60-63 in the list attached. ...

> I didn't know that there were any experiments on the Giffen effect. It would
> be great if you could tell us what's been done.

Ref 25, 35, 42 and 50 describe experiments using monkeys and rats to
demonstrate a Giffen effect... But, Battalio's work was eventually published the
American Economic Review which is I think ranked 2nd world wide in quality. THe
Chicago Journal of Political Economy is I believe ranked first. Ref 41 is a
statistical study of the insurance market and argues that there is a GIffen
effect involved. THere is also somewhere a study of the trade-off's between
fuel oil and kerosene.

This post was _spectacular_, Bill. Thanks a ton. Looks like I have a _lot_ of
reading to do. I am particularly interested in Battalio's paper and the paper on
the Giffen effect in the insurance market.

I can't recall where I saw a "control theory" type explanation of the Giffen
effect. I did find a very brief control theory like account of it in my copy of
Stiglitz, J.E. (1993) _Economics_, NY: Norton:

"Potatoes constitutes a very large fraction of expenditures, and an increase in the
price of potatoes made people so much worse off that in order to survive, they had
to economize strongly on all purchases. The only way they could meet their
nutritional requirements was to cut back on meat, cheese and other high-cost foods
and to increase their consumption of potatoes" (p.207)

So Stiglitz seems to have the right concept: the increase in consumption of
potatoes with an increase in the cost of potatoes occurs when people are on a tight
budget (must control expenditures by economizing) while meeting their nutritional
requirements (must also control caloric intake). The control model explains how
this works _and_ what it means in terms of the nature of the relationship between
cost (disturbance to the expenditure variable) and consumption (output used to
control for both calories and expenditures).

Thanks again for the post. I will get back to you as soon as I've been able to take
a look at the experimental demonstrations of the Giffen effect.

Best regards



Richard S. Marken
310 474-0313