Subsistence and substitutability in consumer preferences

Research output: Working paperWorking papers

Authors

We propose a new three-step model-selection framework for size distributions
in empirical data. It generalizes a recent frequentist plausibility-of-t analysis
We propose a formal description of individual preferences that captures a
subsistence requirement in consumption in an otherwise standard constant-elasticity-ofsubstitution (CES) utility specification. We study how substitutability between the subsistence good and another good depends on the subsistence requirement and the level of consumption of the two goods. We find that the Hicksian elasticity of substitution is zero below the subsistence consumption level, and approaches the standard non-subsistence CES value as consumption of the subsistence good goes to infinity. Above the subsistence threshold, it strictly monotonically increases with income. Whether the two goods are market substitutes or complements depends on, besides the CES-substitutability parameter, the level of income and the subsistence requirement. Our result that with a subsistence requirement substitutability between different consumption goods is nonconstant but increases with individual income has important implications for growth, development and environmental policy.
Original languageEnglish
Place of PublicationLüneburg
PublisherInstitut für Volkswirtschaftslehre der Universität Lüneburg
Number of pages28
Publication statusPublished - 12.2013

    Research areas

  • Economics - Sustainability Economics, subsistence in consumption, substitutability, Hicksian elasticity of substitution, Stone-Geary function

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