Mission Accomplished- Giffen Goods Exist

An interesting working paper- Giffen Behavior: Theory and Evidence;

This paper provides the first rigorous, empirical evidence of the existence of Giffen behavior, i.e., a situation in which consumers respond to an increase in the price of a good by demanding more of it. We begin by examining several theoretical approaches to the Giffen phenomenon and show that in each case Giffen behavior is closely associated with poor consumers' need to maintain subsistence consumption in the face of an increase in the price of a staple commodity. We then present evidence on the existence of Giffen behavior among extremely poor households in two provinces of China. In order to obtain an unbiased estimate of the key price elasticity, we conducted a field experiment in which we randomly subsidized households' primary dietary staple (rice in Hunan province and wheat flour in Gansu province). Using consumption data gathered before, during and after the intervention, we find strong evidence of Giffen behavior with respect to rice in Hunan province. We also find evidence for Giffen behavior in Gansu with respect to wheat; however, the evidence is less robust than for Hunan, due to the (unanticipated) failure of at least two of the theoretical conditions that appear necessary for Giffen behavior. Restricting the Gansu sample to households that meet these conditions provides stronger evidence of Giffen behavior.

Dani Rodrik explains further;

How can demand curves slope upward? Imagine a very poor household who spend a very large part of its income on some subsistence commodity such as rice. Now suppose that the price of rice goes down for some reason. How does the household alter its pattern of consumption? One response is to increase consumption of rice at the expense of other things because rice is now cheaper. This is the standard substitution effect that ensures demand curves are downward sloping. But another is that the household's overall purchasing power--its real income--has increased and therefore the family may choose to consume things, such as meat, that richer families tend to consume. If this decrease in demand for rice outweighs the substitution effect, we have a Giffen good. Put differently, the lower price of rice allows the family to satisfy its nutritional needs by a tastier combination of products, one that relies less on rice and more on meat.

See also Evidence for Giffen Behavior