Tuesday, January 27, 2009

Giffen goods, prostitutes, rice, Levitt and fallacies...

Kudos to our very own VasH (University of Chicago, class of 2013 and soccer player par excellence) for bringing this one to my attention.

It's from Levitt's NYT blog: What Do Prostitutes and Rice Have in Common?:

In an excellent series of guest posts to this blog earlier this year, economist Robert Jensen described his personal quest to prove that rice is a Giffen good for peasants in China.

On The Economist magazine’s Free Exchange blog, the same claim is made about prostitutes:

Less attractive and even cheaper prostitutes may still be available, but for a variety of very good reasons, the customer will not desire the cheapest option, suggesting prostitution services can be classified as a Giffen good.

Are prostitutes Giffen goods? Absolutely not. And understanding why provides a useful economic lesson.
In it there also reference to the Jensen paper that I had mentioned in class on noodles in the North and rice in the South of China. He is referred to as the Indiana Jones of Economics. Read the stuff here and here.


Anonymous said...

Interesting blog and--yes--a helpful lesson. Perhaps worth noting as well that Giffen goods are still very difficult to verify in the real world because we never see ceteris paribus.

For example, in the Chinese rice example, Chinese peasants are seeing the price of all foods rise, not only rice. The substitution effect from more expensive meats and vegetables may be more important that the income effect of higher priced rice.

May be.

chris sivewright said...

The Giffen good example was potatoes and meat i.e. you consumed both. With the prostitutes, it is assumed that you do NOT consume both.

However...if the price of the cheaper prostitute fell then you'd consume the same and then use the money saved for the more expensive prostiute. You'd thus consume more of the expensive prostitute and thus would consume even less of the cheaper one.