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Quality, quantity, and spatial variation of price: Back to the bog

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  • Gibson, John
  • Kim, Bonggeun

Abstract

Estimating potential effects of price reforms is a key issue for many developing countries. Demand studies increasingly use household survey data on budget shares, which vary with quantity, price, and quality. If quality response to price is ignored, estimated price elasticities of quantity demand conflate responses on quantity and quality margins. Our review finds over 80% of published studies using budget shares from household survey data have this error. We use survey data from Vietnam, with prices and qualities observed over space, to directly estimate the price elasticity of quality. This is much larger than what is derived from the income elasticity of quality, based on the Deaton (1988) separability restrictions. Across the 45 items we study, the own-price elasticity of quantity demand is overstated by a factor of four, on average, if the response of quality to price is ignored.

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  • Gibson, John & Kim, Bonggeun, 2019. "Quality, quantity, and spatial variation of price: Back to the bog," Journal of Development Economics, Elsevier, vol. 137(C), pages 66-77.
    • Handle: RePEc:eee:deveco:v:137:y:2019:i:c:p:66-77
    DOI: 10.1016/j.jdeveco.2018.11.008
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    13. Andalón, Mabel & Gibson, John, 2017. "The 'Soda Tax' is Unlikely to Make Mexicans Lighter: New Evidence on Biases in Elasticities of Demand for Soda," IZA Discussion Papers 10765, Institute of Labor Economics (IZA).
    14. Gibson, John & Kim, Bonggeun, 2015. "Hicksian separability does not hold over space: Implications for the design of household surveys and price questionnaires," Journal of Development Economics, Elsevier, vol. 114(C), pages 34-40.
    15. John Gibson & Alessandro Romeo, 2017. "Fiscal-Food Policies are Likely Misinformed by Biased Price Elasticities from Household Surveys: Evidence from Melanesia," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 4(3), pages 405-416, September.
    16. Tom Slayton, 2009. "Rice Crisis Forensics: How Asian Governments Carelessly Set the World Rice Market on Fire," Working Papers 163, Center for Global Development.
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    20. Caro, Juan Carlos & Ng, Shu Wen & Taillie, Lindsey Smith & Popkin, Barry M., 2017. "Designing a tax to discourage unhealthy food and beverage purchases: The case of Chile," Food Policy, Elsevier, vol. 71(C), pages 86-100.
    21. Alim Setiawan Slamet & Akira Nakayasu & Masahiro Ichikawa, 2017. "Small-Scale Vegetable Farmers’ Participation in Modern Retail Market Channels in Indonesia: The Determinants of and Effects on Their Income," Agriculture, MDPI, vol. 7(2), pages 1-16, February.
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    Cited by:

    1. Bianca Peters & Stephanie F. McWhinnie, 2018. "On the rebound: estimating direct rebound effects for Australian households," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 62(1), pages 65-82, January.
    2. Andalón, Mabel & Gibson, John, 2017. "The 'Soda Tax' is Unlikely to Make Mexicans Lighter: New Evidence on Biases in Elasticities of Demand for Soda," IZA Discussion Papers 10765, Institute of Labor Economics (IZA).
    3. Vigani,Mauro & Dudu,Hasan, 2021. "Demand Analysis of Multiple Goods and Services in Vietnam," Policy Research Working Paper Series 9803, The World Bank.
    4. Syed Hasan & Nazmun Ratna & Shamim Shakur, 2019. "Exchange rate, remittances and expenditure of foreign-bornhouseholds: evidence from Australia," Discussion Papers 1901, School of Economics and Finance, Massey University, New Zealand.
    5. Bairagi, Subir & Mohanty, Samarendu & Baruah, Sampriti & Trinh Thi, Huong, 2020. "Changing food consumption patterns in rural and urban Vietnam: Implications for a future food supply system," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 64(3), July.
    6. Andalón, Mabel & Gibson, John, 2018. "The ‘soda tax’ is unlikely to make Mexicans lighter or healthier: New evidence on biases in elasticities of demand for soda," MPRA Paper 86370, University Library of Munich, Germany.
    7. Subir Bairagi & Samarendu Mohanty & Sampriti Baruah & Huong Trinh Thi, 2020. "Changing food consumption patterns in rural and urban Vietnam: Implications for a future food supply system," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 64(3), pages 750-775, July.
    8. John Gibson & Bonggeun Kim, 2017. "30 Years of Being Wrong: A Systematic Review and Critical Test of the Cox and Wohlgenant Approach to Quality-Adjusted Prices in Demand Analysis," Working Papers in Economics 17/16, University of Waikato.
    9. Joselin Segovia & Mercy Orellana & Juan Pablo Sarmiento & Darwin Carchi, 2020. "The effects of taxing sugar-sweetened beverages in Ecuador: An analysis across different income and consumption groups," PLOS ONE, Public Library of Science, vol. 15(10), pages 1-18, October.
    10. Fuchs Tarlovsky,Alan & Gonzalez Icaza,Maria Fernanda, 2020. "Taxing Tobacco in Georgia : Welfare and Distributional Gains of Smoking Cessation," Policy Research Working Paper Series 9130, The World Bank.
    11. Hasan, Syed & Shakur, Shamim & Breunig, Robert, 2021. "Exchange rates and expenditure of households with foreign-born members: Evidence from Australia," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 977-997.
    12. John Gibson & Alessandro Romeo, 2017. "Fiscal-Food Policies are Likely Misinformed by Biased Price Elasticities from Household Surveys: Evidence from Melanesia," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 4(3), pages 405-416, September.
    13. John Gibson & Bonggeun Kim, 2019. "The price elasticity of quantity, and of quality, for tobacco products," Health Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 587-593, April.

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    More about this item

    Keywords

    Demand; Household surveys; Quality; Price reform; Unit values; Separability;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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