ARMENDARIZ, RAMSES2016-05-122016-05-122016-03https://hdl.handle.net/11299/180217University of Minnesota Ph.D. dissertation. March 2016. Major: Economics. Advisors: TIMOTHY KEHOE, PAU PUJOLAS. 1 computer file (PDF); ix, 73 pages.This dissertation contains three independent papers. Each paper is a chapter in this thesis. In chapter 1, I characterize a strictly increasing, quasi-concave, and continuous utility function that accounts for Jensen and Miller’s (2008) empirical finding (i.e., downward sloping demands for food staples among the poorest and least poor of the poor, and upward sloping among the group in the middle) when the consumer maximizes it subject to a budget constraint. According to this utility function, demands for food staples are upward sloping at low income levels because people highly dislike consuming a minimum amount of calories to subsist. Thus, this theory departs from the the standard models of subsistence caloric consumption that employ an exogenous “subsistence constraint” to predict upward sloping demands (Dooley, 1988; van Marrewijk and van Bergeijk, 1990; Gilley and Karels, 1991; Davies, 1994). In chapter 2, I show that the total number of Tequila producers in Mexico exploded after the enactment of NAFTA; in particular, the increment in small Tequila distilleries was significantly larger than the increment in the number of larger distilleries. And many of this new small distilleries are specialized in producing expensive Tequila for exports. By using the Melitz (2003) model as a benchmark, I discard the following three explanations for this change in distribution: (1) A special section in NAFTA called “Regional Products” prohibits the production of Tequila outside Mexico. Consequently, there are no large American distilleries that can employ their economies of scale to sell cheap American Tequila in Mexico and drive small Mexican Tequila producers out of the market. To introduce this environment in Melitz (2003), I assume that the United States does not produce a close substitute to Tequila. (2) Consumers in the United States and Mexico enjoy drinking different varieties of similar spirits. And consumers in both sides of the border consider that Tequila, Bourbon, and Tennessee Whiskey are similar spirits, because the “Regional Products” section in NAFTA protects them all in a similar way (i.e., NAFTA prohibits the production of Bourbon and Tennessee Whiskey outside the United States). Consequently, NAFTA induces trade of expensive Tequila from small Mexican distilleries for Bourbon and Tennessee Whiskey from the United States. To introduce this environment in Melitz (2003), I assume that the United States produces a close substitute to Tequila. (3) Average income on each side of the border is very different. Therefore, consumers in Mexico buy less varieties of spirits than American consumers. Moreover, American consumers buy more expensive varieties of Tequila, because they have a bigger mass of rich consumers. Therefore, the demand for more expensive varieties of spirits in the United States has driven the expansion of small Tequila distilleries that specialize in the production of expensive Tequila for exports. To introduce this environment in Melitz (2003), I assume that “price independent generalized linearity” utility (Muellbauer, 1976) represent consumer preferences in both countries. In Chapter 3, I provide a summary of the literature regarding Giffen behavior. To facilitate the exposition, I have chosen to divide the literature in four historical periods. Each period identifies a different set of dialectic debates regarding upward sloping demands. The first period is the “Early Period”. In this period, the theory of upward sloping demands was born. The second period is called the “Classical Period.” In the Classical Period, economists became aware that the theory of utility is strong enough to explain Giffen behavior. However, they did not know how. The third period is called the “Empirical Period.” In this period, economists noticed that they had no concrete evidence of Giffen behavior. Therefore, they focused on finding this evidence. The last period is called the “Synthesis Period.” In this period, economists found empirical evidence of this phenomenon and constructed a utility-based model that can account for it.enThesis or Dissertation