Given the existence of inferior goods, it's possible to imagine a
Giffen good. A good could be so inferior that, if the consumer's income were to fall at a time when the inferior good's price is rising, the income effect on the inferior good could fully overcome its substitution effect.
However, an individual with DARA might treat insurance as a
Giffen good (3) when the income effect exceeds the substitution effect.
Robson, 1981, Insurance as a
Giffen Good, Economics Letters, 8: 47-51.
Let a consumer consume two goods and let Good 1 be a
Giffen good. Then, Good 1 is necessarily an inferior good, and by Equation (1), Good 1 is a substitute for Good 2.
On the one hand, Boland's tone would lead us to conclude that he is arguing on a priori grounds against the existence of
Giffen goods and feels that this is a legitimate method of argument.
The following proposition states the necessary and sufficient condition for a coinsurance-type insurance policy covering a particular risk to be a
Giffen good without restricting the risk to have a discrete state space:
Thus, Gilley and Karels [1991] claim, in essence, that the food which provides the most calories per dollar spent must be a
Giffen good. In their words [p.
First, if the consumer is subject to a single constraint, as he is in Hicksian utility theory, it is indeed true that an upward-sloping demand curve characterizes a
Giffen good. But this is not so if the consumer faces two constraints, as he does in the Gilley-Karels model.
[8.] Hoy, Michael and Arthur Robson, "Insurance as a
Giffen Good." Economics Letters, Vol.
"Experimental Confirmation of the Existence of a
Giffen Good." American Economic Review, September 1991, 961-70.
Contrary to the well-known result obtained in the standard static model, insurance may not be a
Giffen good in the sense that a transitory increase in the loading factor of insurance always reduces the demand for insurance in the short run, under risk aversion alone.(1) The same result holds for the effect of a permanent change on the long-term demand for insurance.
The question of interest is how to define a
Giffen good. In the original sense of Hicksian utility analysis, potential
Giffen goods are generated by very unusual preferences.
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