Subsistence and substitutability in consumer preferences

Stefan Baumgaertner (), Moritz Drupp and Martin Quaas
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Stefan Baumgaertner: Sustainability Economics Group, Leuphana University of Lueneburg, Germany
Authors registered in the RePEc Author Service: Stefan Baumgärtner

No 290, Working Paper Series in Economics from University of Lüneburg, Institute of Economics

Abstract: 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.

Keywords: subsistence in consumption; substitutability; Hicksian elasticity of substitution; Stone-Geary function (search for similar items in EconPapers)
JEL-codes: D11 I31 O12 Q01 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2013-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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