The Demand for Food of Poor Urban Households in Mexico

Last updated on January 27, 2013

A cool new article in the American Economic Journal: Economic Policy by Manuela Angelucci and Orazio Attanasio:

We use Oportunidades, a conditional cash transfer to women, to show that standard demand models do not represent the sample’s behavior: Oportunidades increases eligible households’ food budget shares, despite food being a necessity; demand for food and high-protein food changes over time only in treatment areas; the treatment effects on food and high-protein food consumption are larger than the prediction from the Engel curves at baseline; and the curves do not change in eligible households with high baseline bargaining power for the transfer recipient. Thus, handing transfers to women is a likely determinant of the observed nutritional changes.

Some of this might be a bit too technical for non-economists, so let’s take a closer look at their findings:

1. The authors look at the impact of Oportunidades, a program in which targeted households receive a cash transfer only if they meet specific conditions. The idea here is to study the demand for food of households who receive the transfer payment, since it relaxes their budget constraint.
2. Because food is a necessity — a good whose quantity demand increases as income increases, but for which the increase in quantity demanded is proportionally less than the increase in income — we would expect the proportion of household income spent on food to decrease as a consequence of the cash transfer. But that is not what happens; rather, the opposite happens, and the proportion of household income spent on food increases.
3. Likewise, the empirical results indicate that the proportion of household income spent on high-protein food increases as well. This is not too surprising to me, given that high-protein foods are usually a luxury good — a good whose quantity demand increases as income increases, but for which the increase in quantity demanded is proportionally more than the increase in income — in developing countries. According to the authors’ baseline estimates, however, this should not be the case here.
4. Oportunidades targets women by giving them the cash transfer. This means that post-Oportunidades, a higher amount of household income is controlled by the woman. This is the likely mechanism through which the cash transfer has the impacts discussed above on food and high-protein foods.

I used the adjective “cool” to describe this paper when introducing it above. First, what I like about this paper is that it looks at urban households, whereas most studies looking at the demand of food focus on rural areas of developing countries. Second, I like the marriage of experimental data and structural econometric modeling the authors bring to the table. This is very refreshing, as it uses experimental data to investigate the mechanisms whereby stuff happens. If I were a betting man, I would bet that this marriage of experimental data and structural empirical work will be very popular over the next 10 years.