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Inferior good and Giffen behavior for investing and borrowing


Kübler, Felix; Seldon, Larry; Wei, Xiao (2013). Inferior good and Giffen behavior for investing and borrowing. American Economic Review, 103(2):1034-1053.

Abstract

It is standard in economics to assume that assets are normal goods and demand is downward sloping in price. This view has its theoretical foundation in the classic single period model of Arrow with one risky asset and one risk free asset, where both are assumed to be held long. However when short selling is allowed, we show that the risk free asset can not only fail to be a normal good but can in fact be a Gi¤en good even for widely popular members of the hyperbolic absolute risk aversion (HARA) class of utility functions. Distinct regions in the price-income space are identi?ed in which the risk free asset exhibits normal, inferior and Gi¤en behavior. Moreover for uility functions with decreasing relative risk aversion, such as the weighted average constant relative risk aversion (WACRRA) class introduced in this paper, the risk free asset can become a Gi¤en good only when it is held long. Examples are provided in which Gi¤en behavior occurs over multiple ranges of income. The analysis is also extended to a two period setting.

It is standard in economics to assume that assets are normal goods and demand is downward sloping in price. This view has its theoretical foundation in the classic single period model of Arrow with one risky asset and one risk free asset, where both are assumed to be held long. However when short selling is allowed, we show that the risk free asset can not only fail to be a normal good but can in fact be a Gi¤en good even for widely popular members of the hyperbolic absolute risk aversion (HARA) class of utility functions. Distinct regions in the price-income space are identi?ed in which the risk free asset exhibits normal, inferior and Gi¤en behavior. Moreover for uility functions with decreasing relative risk aversion, such as the weighted average constant relative risk aversion (WACRRA) class introduced in this paper, the risk free asset can become a Gi¤en good only when it is held long. Examples are provided in which Gi¤en behavior occurs over multiple ranges of income. The analysis is also extended to a two period setting.

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1 citation in Web of Science®
2 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2013
Deposited On:20 Jul 2012 07:16
Last Modified:05 Apr 2016 15:53
Publisher:American Economic Association
ISSN:0002-8282
Publisher DOI:https://doi.org/10.1257/aer.103.2.1034
Official URL:http://www.aeaweb.org/forthcoming/output/accepted_AER.php
Related URLs:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1952110
Other Identification Number:merlin-id:7153

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