The Indiana Jones of Economics, Part II

JensenRobert Jensen

In the second installment of his adventure story about searching for the elusive Giffen good, Robert Jensen describes some of the setbacks they suffered along the way.

Raiders of the Lost Arc Elasticity, Part II

By Robert Jensen

Let me start at the beginning to explain how our search for a Giffen good evolved. About five years ago, I was using a large, publicly available data set of Chinese households to explore the link between income and health. My colleague Nolan Miller walked into my office, saw what I was doing and asked, half as a joke, if I’d looked for a Giffen good.

I looked at my data, and sure enough, there it was. Higher rice prices in southern provinces of China were associated with higher rice consumption. The same held in northern provinces with wheat (things like noodles). We giggled like idiots, and quickly wrote up the results in a short paper.

But then the ground began to rumble as a giant boulder rolled towards us: The Identification Problem. Readers of this blog will know this problem well, but I’ll describe how it applies here.

Remember, we’re looking for a positive correlation between price and consumption/demand — higher prices associated with higher quantity demanded, lower prices with lower quantity demanded. So, let’s say we see a bunch of towns, and people living in those towns with the highest rice prices consume the most rice. Case closed, right?

Not quite. Plain old economics tells us that if people want more of some good, its price goes up. So, we see high rice prices where there is high rice consumption, but did the high consumption cause the high price (economics as usual) or did the high price cause the high consumption (Giffen behavior)?

The usual solution to this problem is to find some outside factor that affects the price but does not affect demand (except through price), and then in effect look at how the change in price associated only with this factor affects demand.

So we tried matching the data to rainfall records (rainfall affects crop yields, and thus price). After spending months and months on this, there just wasn’t enough data to estimate the relationship well, so the procedure failed. And anyway, we began to think this wasn’t a valid strategy, since rainfall could also affect the demand for rice (by affecting wages, the prices of other goods besides rice, and a host of other factors).

So, we were thwarted — we had some evidence of Giffen behavior, and it was sort of believable, but not quite.

We were on the verge of tossing out the whole project when it hit us: why not go to China, give people subsidies to change the price they pay for foods and see what happens? This way, we would know that our price change caused the change in consumption, and the identification problem would be solved.

So we did just that. We teamed up with a respected Chinese economist, Sangui Wang, and I headed off to China, fedora on my head and trusty whip by my side (OK, Yankees cap and laptop).

Together, we set out across China, through deserts and forests, from half-empty villages to bustling cities, searching for clues by interviewing the poorest people about their diets. Theory told us where to look for Giffen behavior — the “Giffen conditions” included: households that were extremely poor, and consuming a simple diet of primarily a basic good (like rice or wheat), a little bit of a fancy good (like meat), and little else of budgetary or nutritional significance.

We chose one southern province, Hunan, where rice was the dominant staple, and one northern province, Gansu, where wheat was dominant. It became clear early on in our travels that the Giffen conditions seemed to hold almost everywhere we went. Thus, theory told us these guys should be Giffen consumers, so it was time to put the theory to the test.

We chose our sample sites and assembled a data collection team. We printed vouchers that households could use to purchase rice (in Hunan) and wheat (in Gansu) at subsidized rates for six months, and contracted with local shopkeepers to honor the vouchers in exchange for reimbursement. We gathered a pre-subsidy baseline survey for 1,300 households, chose at random which households would receive the vouchers, and returned for two more rounds of data collection, one during the subsidy period, and one after the subsidy had ended.

All that was left to do was wait. This made for a very tense half year.

As the months passed and the program ended, I’d wake up every morning and run to my computer to check if the data had come in. I knew it would take a while for our local team in China to enter and validate the data, but I couldn’t help checking over and over, like a rat pressing a lever hoping for a pellet of food.

And then one day, there it was, the e-mail from our team with a file attached. This was the culmination of a long journey, over five years of our lives, with our academic reputations on the line. Hearts pounding, faces flushed and hands trembling, we ran the first regression …

… and found the exact opposite of what we were looking for.

Next time: What went wrong?


@carl: A Giffen Good has to be an inferior good.

And I second Michael D.


Yankees cap and laptop? That's not Indiana Jones--that's Short Round!

carl winter

Common sense will find plenty of examples of Giffen goods in less exotic transactions -- if you take into account the expectation that prices will continue to rise. So rising real estate prices actually increases the demand for houses, and the rising price of gold raises the demand for Krugerrands etc.

We could talk about tulip frenzy and other bubbles, but the question is how do these examples differ from the Giffen problem?


For a second there I was concerned you were going to try and inflate the price of rice.

I was glad to read you decided to test the converse.


Just out of curiousity: How large was the subsidy program? How much did it cost? I'm curious because this seems to be an interesting direct experiment which is (relatively) rare in economics.


Maybe you DID inflate the price of rice. Seems like you just increased people's buying power of rice. Wouldn't that - even if you were decreasing the effective price for those people - increase the actual market price?

I'm not an economist, just an interested reader, but is there some validity to my theory?

Witty Nickname

What went wrong...

They realized the price was subsidized only for a limited time and stocked up so sales during the subsidized period went up, and then when the subsidy ended they didn't buy rice for a while.

Michael D

One of the best series of posts on this site.


In the Monkees song "I'm a Believer" there's a line:

"I thought love was more or less a given thing, Seems the more I gave the less I got."

If you change the word "given" to "Giffen" it doesn't really change how the song sounds when sung.

Does this imply that the Monkees think love is a Giffen thing? The lyrics imply that as the amount you pay increases, you get less and less love in return.

Is love a Giffen thing?

C. Coop

Was there some serious rice arbitrage going on? If I received a voucher for discounted rice, I'd sell as much discounted rice as possible to my neighbor for just under the market price, and then use the profits buy meat.


What went wrong? I assume you created a bullish futures market in rice and wheat. People knew for sure that prices would increase at the end of six months. This basically reinforces demand theory rather than contradicts it. It would simply show that people are willing to buy more rice or wheat at a lower present price than they are at a higher future price.

For this experiment to work, the consumers would have to think that the vouchers were not only unlimited in supply, but that they would be valid indefinitely. Even then, I find it hard to believe that anyone would believe that vouchers would last forever.

I think you would have to convince the hunan and gansu people that they were the benefactors of a permanent government program. Then, after their buying habits normalized, you could then invalidate the vouchers and see how they reacted.


The Giffen good concept depends upon a very artificial situation. The consumers must be on the brink of starvation: the total income is currently spent on rice and meat, and that's just enough to survive. They must prefer to eat meat, or some other expensive alternative. So the price of rice goes up, and they eat more rice because they can't afford meat, and otherwise they don't get enough to eat.

But if the price of rice goes down, nothing compels them to change their pattern of consumption at all. Perhaps they'll eat more in total - more meat and more rice. Perhaps they'll buy shoes or just save the money. The reason the theory works (at least in theory) with the price going up is that it involves reducing the choices available. With the price going down, choice is increased, so there should be no predictable effect. Up and down are not symmetrical. If the price of rice goes down, it ceases to be a Giffen good!



I realized that giffen good is an inferior good. The good which doesn't follow the law of demand, we might say that is a good with a bizarre quality.

Somithing which went wrong is that you made fluctuaction in prices for a short period for good which has negative income effect actual than the substitution effect.
Everyone knew that after six months, they will turn back to they rice. The sellers could stock their rice at the end of that period; they might increase the prices as they want because as prices increase as the demand increase.

As conclusion, you made the chinese at risk to consume the expensive good after six months.

Stephanie Manosalvas

So, which were the conditions of the subsidie? How it was executed? Even the answers for these questions seem to have no influence in the final result, the little details could had modify what happen with this experiment.