Blog

The Indiana Jones of Economics, Part II

May6,2008@12:23pm
byStevenD.Levitt

RobertJensen
InthesecondinstallmentofhisadventurestoryaboutsearchingfortheelusiveGiffengood,Robert
Jensendescribessomeofthesetbackstheysufferedalongtheway.

RaidersoftheLostArcElasticity,PartII

ByRobertJensen

LetmestartatthebeginningtoexplainhowoursearchforaGiffengoodevolved.Aboutfiveyears
ago,Iwasusingalarge,publiclyavailabledatasetofChinesehouseholdstoexplorethelinkbetween
incomeandhealth.MycolleagueNolanMillerwalkedintomyoffice,sawwhatIwasdoingandasked,
halfasajoke,ifIdlookedforaGiffengood.
Ilookedatmydata,andsureenough,thereitwas.HigherricepricesinsouthernprovincesofChina
wereassociatedwithhigherriceconsumption.Thesameheldinnorthernprovinceswithwheat(things
likenoodles).Wegiggledlikeidiots,andquicklywroteuptheresultsinashortpaper.

Butthenthegroundbegantorumbleasagiantboulderrolledtowardsus:TheIdentificationProblem.
Readersofthisblogwillknowthisproblemwell,butIlldescribehowitapplieshere.

Remember,werelookingforapositivecorrelationbetweenpriceandconsumption/demandhigher
pricesassociatedwithhigherquantitydemanded,lowerpriceswithlowerquantitydemanded.So,lets
sayweseeabunchoftowns,andpeoplelivinginthosetownswiththehighestricepricesconsume
themostrice.Caseclosed,right?

Notquite.Plainoldeconomicstellsusthatifpeoplewantmoreofsomegood,itspricegoesup.So,we
seehighricepriceswherethereishighriceconsumption,butdidthehighconsumptioncausethehigh
price(economicsasusual)ordidthehighpricecausethehighconsumption(Giffenbehavior)?

Theusualsolutiontothisproblemistofindsomeoutsidefactorthataffectsthepricebutdoesnot
affectdemand(exceptthroughprice),andthenineffectlookathowthechangeinpriceassociated
onlywiththisfactoraffectsdemand.

Sowetriedmatchingthedatatorainfallrecords(rainfallaffectscropyields,andthusprice).After
spendingmonthsandmonthsonthis,therejustwasntenoughdatatoestimatetherelationshipwell,
sotheprocedurefailed.Andanyway,webegantothinkthiswasntavalidstrategy,sincerainfallcould
alsoaffectthedemandforrice(byaffectingwages,thepricesofothergoodsbesidesrice,andahost
ofotherfactors).

So,wewerethwartedwehadsomeevidenceofGiffenbehavior,anditwassortofbelievable,but
notquite.

Wewereonthevergeoftossingoutthewholeprojectwhenithitus:whynotgotoChina,givepeople
subsidiestochangethepricetheypayforfoodsandseewhathappens?Thisway,wewouldknow
thatourpricechangecausedthechangeinconsumption,andtheidentificationproblemwouldbe
solved.

Sowedidjustthat.WeteamedupwitharespectedChineseeconomist,SanguiWang,andIheaded
offtoChina,fedoraonmyheadandtrustywhipbymyside(OK,Yankeescapandlaptop).

Together,wesetoutacrossChina,throughdesertsandforests,fromhalfemptyvillagestobustling
cities,searchingforcluesbyinterviewingthepoorestpeopleabouttheirdiets.Theorytolduswhereto
lookforGiffenbehaviortheGiffenconditionsincluded:householdsthatwereextremelypoor,and
consumingasimpledietofprimarilyabasicgood(likericeorwheat),alittlebitofafancygood(like
meat),andlittleelseofbudgetaryornutritionalsignificance.

Wechoseonesouthernprovince,Hunan,wherericewasthedominantstaple,andonenorthern
province,Gansu,wherewheatwasdominant.ItbecameclearearlyoninourtravelsthattheGiffen
conditionsseemedtoholdalmosteverywherewewent.Thus,theorytoldustheseguysshouldbe
Giffenconsumers,soitwastimetoputthetheorytothetest.

Wechoseoursamplesitesandassembledadatacollectionteam.Weprintedvouchersthat
householdscouldusetopurchaserice(inHunan)andwheat(inGansu)atsubsidizedratesforsix
months,andcontractedwithlocalshopkeeperstohonorthevouchersinexchangeforreimbursement.
Wegatheredapresubsidybaselinesurveyfor1,300households,choseatrandomwhichhouseholds
wouldreceivethevouchers,andreturnedfortwomoreroundsofdatacollection,oneduringthe
subsidyperiod,andoneafterthesubsidyhadended.

Allthatwaslefttodowaswait.Thismadeforaverytensehalfyear.

Asthemonthspassedandtheprogramended,Idwakeupeverymorningandruntomycomputerto
checkifthedatahadcomein.IknewitwouldtakeawhileforourlocalteaminChinatoenterand
validatethedata,butIcouldnthelpcheckingoverandover,likearatpressingaleverhopingfora
pelletoffood.

Andthenoneday,thereitwas,theemailfromourteamwithafileattached.Thiswastheculmination
ofalongjourney,overfiveyearsofourlives,withouracademicreputationsontheline.Hearts
pounding,facesflushedandhandstrembling,weranthefirstregression

andfoundtheexactoppositeofwhatwewerelookingfor.

Nexttime:Whatwentwrong?

TAGS:robertgiffen,robertjensen