1) The document summarizes an experiment conducted by Robert Jensen and Nolan Miller that provides the first real-world evidence of Giffen behavior. They conducted a field experiment in two Chinese provinces, providing subsidies for staple foods (rice or wheat) to see how consumption patterns changed. 2) They found clear evidence that among poor but not extremely poor households consuming 60-80% of their diet as staple foods, a price increase for the staple led to increased consumption, providing evidence of Giffen behavior. 3) This was the first experiment to meet the conditions necessary to isolate Giffen behavior, such as holding other factors like income constant, and providing important insights into when and where G

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TRACKING A REAL-WORLD GIFFEN
GOOD
Sukanya Honkote
SYBA
Roll no: 46

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INDEX
Contents Pg. No.
 Preface ………………………………………….. 3
 Tracking a real-world Giffen good………………… 4
 Giffen Theory
 Giffen Experiments : A Walk Through History
 The Jensen and Miller Experiment
 Significance of the Giffen phenomenon………….. 12
 Way Forward……………………………………… 13
 References………………………………………… 14
 Appendix …………………………………………. 15

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PREFACE
The Giffen Good theory or the Giffen‘s paradox has for long been a rather embarrassing
part of microeconomic theory due to its lack of theoretical and empirical backing. Yet it has
found mention even in the most basic economics textbooks as an exception to the Law of
Demand. Most classrooms end up not having a deeper discussion of this phenomenon since they
assume that not much literature has been added to this theory since Marshall first proposed it.
This paper aims to show how far research on the Giffen phenomenon has come and how the
theory stands so far. It will show that it is relevant not only as a theoretical antithesis to the Law
of Demand but that it is also entrenched in reality.
The paper first illustrates the Classical explanation of the Giffen‘s paradox. It later takes
a look at the research and studies done to find real world evidence of the Giffen phenomenon. It
presents a brief outline of the paper released by Robert Jensen and Nolah Miller in 2008, in
which they document their successful attempt at isolating Giffen behavior and bringing it to light.
Their paper is important because it was the first successful attempt at finding evidence of Giffen
behavior and thus has been subjected to deeper analysis in my paper. My paper shows how their
and other studies like theirs have changed the theory from what Marshall had proclaimed and has
made the theory more valid and acceptable. It finally talks about the significance of real-world
evidence of this phenomenon and how more evidence of this kind needs to be found all over the
world.
It is hoped that, the historical discourse on the Giffen phenomenon, the efforts to find real
evidence of such behavior and the various methodologies that were exercised in said search will
become clear through this paper.

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Tracking a real-world Giffen good
The ―Law of Demand,‖ which holds that as the price of a good increases, consumers‘ demand
for that good decreases, is one of the bedrock principles of microeconomics. All of consumer
theory is derived from this basic theory. An exception to this theory that has found mention in
even the most basic economic textbooks, but has never been supported by any conclusive
empirical data is the Giffen‘s Paradox which states that there exist goods (of inferior quality)
whose demand falls as price decreases i.e. for those particular goods, price and demand are
positively related to each other for such goods.
The classic example given by Marshall is of inferior quality staple foods, whose demand is
driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price
of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and
must consume more of the staple food.
―As Mr.Giffen has pointed out, a rise in the price of bread makes so large a drain on the
resources of the poorer labouring families and raises so much the marginal utility of money to
them, that they are forced to curtail their consumption of meat and the more expensive
farinaceous foods: and, bread being still the cheapest food which they can get and will take, they
consume more, and not less of it.‖
—Alfred Marshall, Principles of Economics (1895 ed.)
However, while the theory makes logical sense, it has been proved since that time by George
Stigler (1947) and Roger Koenker (1977) 1
that none of the staple foods like bread or wheat were
Giffen goods during Marshall‘s time and aren‘t so now either. Research by Sherwin and Rosen
also disproved Paul Samuelson‘s example of potatoes during the Irish famine of 1845-47. [Also
see appendix to read more about Paul Samuelson‘s example]
Due to the elusiveness of a concrete real-world example of a Giffen good, many economists
dismissed claims that such a paradox could exist in real life. However, now through new
research, evidence has come up to show that under certain conditions, such a phenomenon could
exist, but before we look into that, lets first go over the existing theory.

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 Giffen Theory
The Law of Demand: All other things being equal, price and demand of a good are inversely
related. The total effect of a price change is actually combined of two different effects:
1) Income effect: As the price of a commodity rises, it may be considered as if the income
(being constant) of the consumer has declined. Therefore, the income effect of a change in price
tells us that as price rises quantity demanded would fall and vice-versa for normal goods.
2) Substitution effect: As the price of a commodity rises, it becomes relatively more expensive
than the substitute goods. Hence, consumers substitute the alternative product for the good
whose price has risen. Therefore, the substitution effect of a change in price also tells us that as
price rises the quantity demanded would fall and vice-versa for normal goods.
Price-Demand relationship for an Inferior Good:
An inferior good is a good that decreases in demand when consumer income rises, prices held
constant. Thus consumers move on to better quality goods when their income rises and abandon
the goods of inferior quality. When the price of such a good decreases, the income effect makes
you shift from that good. However, this effect is weaker than the substitution effect which makes
consumers buy more of the commodity as its price has decreased. Thus, even for inferior goods,
one consumes more of the commodity as its price decreases and vice-versa.
The case of a Giffen Good:
A Giffen good is an extreme type of inferior good. The negative income effect of changes in
price of a Giffen good is actually stronger than the substitution effect. This leads to its bizarre
quality: when the price of a Giffen good rises, consumers actually buy more.
This type of consumption will only be seen in among subsistence consumers since for the rich a
good is either inferior or normal.

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Figure 1: GIFFEN GOODS REPRESENTED THROUGH INDIFFERENCE CURVES
As we can see in Fig.1, the quantity of Giffen good consumed at point A (0Q1) is
lower than the quantity consumed at point B (0Q2) even though price of the Giffen good has
increased. Elbow-shaped ICs (indifference curves) are typical to Giffen goods.
 Giffen Experiments: A Walk Through History
It is generally believed that when Marshall brought up the phenomenon of a Giffen good,
he was referring to the famine in Ireland (1845-47), when Sir Robert Giffen allegedly observed
people consuming more of potatoes in spite of a rise in its prices. Thus, concluding that potatoes
were a Giffen good.
Subsequent, researchers have pointed out the following defects in the argument:
1) Since the famine was caused die to a blight that destroyed much of the potato crop, it is
unlikely that people consumed more potatoes, at least in the aggregate.

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2) Sir Robert Giffen never seems to have put anything regarding the Irish famine and the
potato into writing and moreover, having been born in 1837, Giffen would have been a
mere child in England at the time of the famine in Ireland.
As to the veracity of the claims itself, there is no individual or market level data that
could be used to verify the claims.
Bopp demonstrated empirically that between 1967 and 1976 kerosene was a Giffen
good. This research was one of the first steps away from discussion of Giffenity in only the
theoretical context. According to Bopp, ―"kerosene usage is associated with the heat
requirements of the less affluent since when it is burnt it gives off an odor that is, at best, not
pleasant. When kerosene prices, but not distillate ones, increase, the real income of the kerosene
user is reduced so that less regular heating fuel can be burned. As kerosene prices fall, real
income is increased allowing the purchase of regular heating fuel that is odorless when burned
and has a higher btu content than kerosene.‖
In another attempt at finding a Giffen good, a field experiment was conducted by
Shmuel Baruch and Yakar Kannai in 2001, where they found evidence to show that the lowest-
grade rice-based Japanese spirit (shochu) was a Giffen good.
However, both the experiments used market-level data where it is highly unlikely
that all the ceteris paribus conditions would have been fulfilled. The results of their research,
though cited very often, have however been a subject of much criticism and questioning.
John Nachbar, in his 1996 paper, ‗The Last Word on Giffen Goods?‘ questioned the
very theoretical basis of Giffenity. He showed how a market for a Giffen good is inherently
unstable and therefore theoretically impossible. Price mechanism works on the premise that
demand is inversely related to price and supply is directly related to price. It stands to reason
then that a market where both supply and demand are directly related to price cannot exist!
The general view that started forming was that while a real-world Giffen good did
not exist, Giffen behavior itself was quite possible. The new goal now, was to find evidence of
‗Giffen behavior‘ instead of a Giffen good. It was felt that trying to find evidence of giffen
behavior through market data is futile. If only a small segment of the population bought more of
a good when its price increased, then their upward sloping demand curves might get hidden by
the market demand curve that shows only majority behavior.

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Certain lab experiments were able to find evidence of Giffen behavior.
Raymond C. Battalio, John H. Kagel, and Carl A. Kogut in 1991, found evidence of upward
sloping demand among rats given limited ―budgets‖ and the choice between root beer and a
quinine solution, R. J. DeGrandpre et al. (1993) found in a laboratory setting that human
smokers, given the choice between brands of cigarettes and a limited budget of ―puffs,‖ can
exhibit Giffen behavior. Although, this helped establish to some degree that Giffen behavior
existed, it was still important to see which segment of the population demonstrated such behavior
in the real world and to what degree.
 The Jensen and Miller experiment
Robert T. Jensen and Nolan H. Miller conducted an experiment in two provinces in
China (Gansu and Hunan) and came out with the first real-world evidence of the Giffen
phenomenon in 2008. They concluded that a certain segment of the population that is poor and
faces subsistence nutrition concerns, whose diet consisted of a few simple foods, would exhibit
Giffen behavior towards their staple food (the food that gives them the highest calories).
1] The Experiment
Jensen and Miller conducted a field experiment in which, for five months, in which
randomly selected households were given vouchers that subsidized their purchases of their
primary dietary staple. In particular they selected two provinces of China: Hunan in the south,
where rice is the staple good, and Gansu in the north, where wheat is the staple. The experiment
in these provinces focused on households classified as the ―urban poor‖; thus being careful to not
select people who actually cultivated these crops. The selection of the province and the segment
of the people to be experimented on were decided on the reasoning that Giffen behavior is most
likely to be seen under the following conditions:
―C1: Households are poor enough that they face subsistence nutrition concerns.
C2: Households consume a very simple diet, including a basic (staple) and a fancy good.
C3: The basic good is the cheapest source of calories available, comprises a large part of the
diet/budget, and has no ready substitute.‖
C4: Households cannot be so impoverished that they consume only the staple good i.e. on
occasion they do consume a fancy good like meat.‖

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The theory thus predicts that only consumers who are poor, but not too poor, will exhibit Giffen
behavior.
2] Meeting the ceteris paribus requirements
In order to find valid evidence of Giffen behavior they needed to create
conditions where the ceteris paribus conditions could be met to the most possible extent. This is
how they met each requirement.
a. Habits, tastes and fashions remain constant
Since the people participating in the experiment belonged to the lower economic classes,
their food habits were constant. Food consumption in such a strata works on the principle of
maximizing calorie intake which only the staple foods can fulfill at their budgets. Thus, the
question of change in taste or fashion doesn‘t arise.
b. Income of the consumer does not change.
The researchers, through direct surveys conducted before, during and after the
experiment, calculated the change in income (fixed and otherwise) of the participating
households and found that the resultant change in diet for example in the Hunan province, was
only in the 1% range. This change was considered negligible enough to assume that the budget
on food was virtually constant during the time of the experiment.
c. Prices of other goods remain constant
This was done indirectly, by calculating the change in budget for the diet. Since, the
change in the budget was only in the 1% range, and dietary substitutes themselves were limited,
it could be said that the effects of change in prices of other goods was eliminated. (Please note
that the provinces chosen for this experiment were chosen because the people there consumed a
limited number of goods, whose prices tend to be stable)
d. The commodity in question has no substitute
Since rice and wheat are the sole commodities in their category that provide such
high calories at such low prices, it is alright to assume that the commodity in question has no
substitutes.
e. People do not expect changes in the prices.
The provinces in question were told beforehand that they would be receiving
subsidy vouchers on food, so they did expect a price change. However, in addition to that they
were told that the vouchers were only valid through the duration of this experiment which was 5

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months. Now, this if anything, would go against what the researchers are trying to prove,
because it might stimulate more buying of the cheaper good at the shops when the subsidies are
given. In any case,
Other confounding variables that could have affected the experiment were:
- Quality Substitution
The survey conducted of the regions before the experiment, showed that the
households there almost exclusively consumed low quality varieties of their staple
food. Therefore, better quality goods were not available. Thus, quality substitution
in response to the price subsidy was not a concern for their analysis. In any case,
the households were asked to maintain a diary wherein they would have to enter
their daily dietary consumption and it was this data that was used to look for
Giffen behavior. If quality substitution had taken place, it would have been found
through this method.
- Cashing-out or reselling of the vouchers
Each household had to sign on their own vouchers and while using them,
shopkeepers were told to ensure that the households produced their own vouchers.
Households were given explicit instructions to not cash-out their vouchers at the
retailers. In any case, they felt that cashing out the vouchers and using that money
to buy something else was the same as using the vouchers and using the money
saved to buy something else and hence made no difference to the experiment.
3] Results of the experiment
The researchers found clear evidence of Giffen behavior in Hunan (rice eating province)
and ―somewhat less robust evidence‖ in Gansu (wheat-eating province). [See appendix for more
information on the results.] It was found that a 1 percent increase in the price of rice caused a
0.22 percent increase in rice consumption (i.e., consumption declined when the subsidy was
given, and increased when it was removed) in Hunan, while the subsidy made the people shift
more towards consumption of meat, the fancy good. The reason for the lack of evidence in
Gansu is given to be problems in the design of the experiment which failed to take in the variety

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of wheat products that could be bought from the market. (In many cases price changes simply
made them shift to different wheat goods.)
The results supported their theory that only ‗the poor but not-so-poor‘ will show Giffen
behavior and also provided a range wherein such consumption could be expected- people whose
consumption of high calorie staple food was between 60-80% of all consumption showed Giffen
behavior. This range is important from the policy-making point of view since it provides a
threshold for subsistence consumption of ‗the poor but not-so-poor households‘. According to
Jen and Miller, the poor but not-so-poor households are a segment of the population that consists
of at least 90 million households in China itself.
Most importantly, this research showed that there is heterogeneity in consumption
among the poor. It showed that there are very real chances that subsidies given to improve
nutrition levels of the poor may not work for a very big segment of the poor. This realization
might help to design better anti-poverty programs.
4] Criticism
 Did they finally find the proof of exception to the law of demand? Yes and no. For
individual demand yes and for market demand no. I feel that this point should have been
emphasized in the paper.
 The sample consisted of 1300 households (selected randomly) with 3661 individuals
spread across the two provinces. While that is a good sample size, in Hunan province
where 650 households made up the sample, only 45 households actually consumed the
fancy good i.e. meat. So one of the reasons for the weak substitution effects could be that
the number of families who substituted meat for rice were themselves few.
However, the research showed that Giffen behavior may not be rare at all and it gave specific
parameters as to where exactly it should be looked for. Their method of conducting the research
will definitely give a better direction for further research in this field.

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Significance
Why is the Giffen phenomenon so significant?
In the theoretical context, it is obvious. It would be possible to establish that an
exception to the Law of Demand does in fact exist. There exist other theories like the
Conspicuous Consumption theory and the ‗bandwagon effect‘ which also provide cases where it
is possible for demand to be higher as price increases and vice-versa. However, these anomalies
are different from the Giffen phenomenon in one fundamental aspect and that is that the demand
behavior seen in these cases is a result of a change in preferences being caused due to a change
in price. Preferences are linked to prices and in the case of the ‗Bandwagon effect‘, market trends
determine demand behavior. Thus, these theories violate at least one ceteris paribus rule of the
Law of Demand (That of the assumption that the preferences, market trends (fashion) etc do not
change). In the Giffen good phenomenon, price doesn‘t bring about a change in preferences;
rather the change in observed demand is a result of the income and substitution effects of a
change in price. Thus, it is the only real exception to the law.
In the practical context, since Giffen behavior is mostly seen in poor people it is
important for policy makers to make take note of this before designing subsidy programs for the
poor. In India, we have the Public Distribution System where rice and wheat are distributed to
the poor for as low as Rs.3-5/kg. However, we find that malnutrition and under-nutrition are
rampant in spite this subsidy and also a surge in growth and incomes. Nutrition levels have
actually declined while consumption of fats has ―unambiguously‖ increased.‖ Could this be
because households are consuming unhealthy, outside food instead of directing increased income
to healthier food consumption? It is not very unlikely since India lacks basic literacy regarding
health and diet. Such a finding would point to an urgent need to increase investment in nutrition-
related knowledge disbursal, rather than further lowering of prices. It has serious implications on
the Right to Food Act that the UPA II Government is trying to pass in its term. Even pricing of
cereals and introducing pulses, iodized salt etc in the PDS entitlements will need to be
reconsidered.
The Giffen phenomenon is thus of great practical and theoretical significance.

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Way Forward
Although the Jensen and Miller experiment was widely lauded as one that would lay to
rest all the claims that the Giffen phenomenon is a myth, there is no doubt that similar such
experiments need to be conducted to strengthen their results.
A hypothetical experiment suggested by Uriel Spiegel in 1994 went like this:
―Assume that an individual must make five round trips per week from his or her residence to his
or her place of employment. The number of weekly trips is fixed, but the individual has the
option of using either public or private transportation (for our purposes, private means much
more expense as well as more comfort and more convenience, e.g., taxi or car service, or use of
the employee's private car with the associated parking fees, tolls, gas, etc.). There is little doubt
that public transportation is an inferior good, it is quite possible that in many cases it is a Giffen
good. Each trip by public transportation costs $1, and a trip by private transportation costs $5. If
the weekly transportation budget is $13, the individual uses private transportation twice a week
and public transportation three times a week. However, if the price of public transportation is
increased to $2 for each trip while the budget constraint and private transportation price stay the
same, the only way to get to work subject to the same budget is four trips by public
transportation and one trip by private transportation. A low enough price for public
transportation could allow the consumer an occasional treat of private transportation and still
remain within the transportation budget. An increase in the price of public transportation (even if
it is still much cheaper than private transportation) could reduce the real income of the consumer
enough to force him or her to reduce or abandon the occasional use of private transportation and
would thereby cause an increase in the quantity demanded of public transportation. “
In Mumbai, a similar survey can be conducted for people commuting through a
combination of bus and rickshaw. Of course, it will have to be around the event of a bus fare
hike with rickshaw fares remaining constant. The Jensen & Miller experiment can be replicated
in India by using millet and jowar grains in states like Rajasthan, Madhya Pradesh etc as the
basis of study.

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It is by conducting more such experiments, that we are going to be able to validate this
phenomenon and thus enrich the existing microeconomic theory.
REFERENCES
1) Stigler George, Notes on the History of Giffen Goods - The Journal of Political Economy,
Vol. 55, No. 2 (Apr., 1947), pp. 152-156
2) Koenker Roger, Was Bread Giffen? The Demand for Food in England Circa 1790- The
Review of Economics and Statistics Vol. 59, No. 2 (May, 1977), pp. 225-229
3) Gerald P. Dwyer Jr. and Cotton M. Lindsay (1984), Robert Giffen and the Irish potato-
American Economic Review, Vol. 74, No. 1 (March), pp. 188- 92
4) Terrence McDonough and Joseph Eisenhauer-Sir Robert Giffen and the Great Potato
Famine: A Discussion of the Role of a Legend in Neoclassical Economics- Journal of
Economic Issues v29 p747-59, 1995
5) Bopp, A. E. 1983. The demand for kerosene: A modern Giffen good- Applied Economics
15 (August): 459-67.
6) Jensen Robert and Miller Nolan Giffen Behavior and Subsistence Consumption-
American Economic Review 2008, 98:4, 1553–1577
7) Baruch Shmuel and Kannai Yakar Inferior Goods, Giffen Goods, and Shochu-
8) Deaton Angus and Drèze Jean, Food and Nutrition in India: Facts and Interpretations,
February 14, 2009 vol xliv No 7 Economic & Political Weekly
9) Spiegel Uriel, The Case of a "Giffen Good"- The Journal of Economic Education, Vol.
25, No. 2 (Spring, 1994), pp. 137-147

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APPENDIX
1) Paul Samuelson‘s ‗potato paradox‘:
2)

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The figure shows the results of the Jensen and Miller experiment in each of the
provinces. The horizontal axis represents calorie share of the staple good per 1 calorie of
food. The vertical axis represents price elasticity of the staple good. It can be seen that in
Hunan province, for the households that the staple food consisted of 60-80% of their diet,
price elasticity is positive. In Gansu, the same is true for the households for whom wheat
made up 40-60% of their diet, though this evidence is somewhat less convincing.

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SYNOPSIS
For more than a century economists have argued over the possibility of a positively
shaped demand curve. This inevitably led to a discussion on Giffen goods and their doubtful
existence. Some economists like George Stigler (1947) were openly skeptical of the whole idea
of trying to find a real-world Giffen good. He said in his paper, ‗Notes on the History of Giffen
Goods‘ (1966), ―If an economist were to demonstrate its (The Law of Demand‘s) failure in a
particular market at a particular time, he would be assured of immortality, professionally
speaking, and rapid promotion while still alive. Since most economists would not dislike either
reward, we may assume that the total absence of exceptions is not from lack of trying to find
them.‖ Many others have insisted that future writers of textbooks should simply avoid making
any mention of the Giffen phenomenon with Sherwin Rosen (Author of the paper, ‗Potato
Paradoxes‘, 1999) stating, ―Fictions have no place in the teaching of economics.‖
Still, the Giffen theory has not only survived all such disbelief but has also gradually
progressed in theory and research. This paper sets out to discover just how the theory has
evolved and with what degree of success have the practical aspects have been studied so far. The
paper first illustrates the Classical explanation of the Giffen‘s paradox. It later takes a look at the
research and studies done to find real world evidence of the Giffen phenomenon. It presents a
brief outline of the paper released by Robert Jensen and Nolah Miller in 2008, in which they

18. 18
document their successful attempt at isolating Giffen behavior. It points to the heterogeneity
among the poor and how important it is for policy makers to be aware of it. It finally talks about
the theoretical and practical significance of real-world evidence of this phenomenon and how
more evidence of this kind needs to be found all over the world.
This paper also talks about the possibility of conducting research in India on
the lines of the Jensen and Miller experiment to strengthen the existing evidence. It discusses the
relevance of this theory to India‘s nutrition levels and provides a different take on India‘s
seemingly lowering nutrition levels.
This paper is thus, a collation of personal opinions and the historical and present
findings on the Giffen phenomenon- one of the most enduring mysteries of economics.