Index-Number Tests and the Common-Scaling Social Cost-of-Living Index
AbstractFor a change in prices, the common-scaling social cost-of-living index is the equal scaling of every individual's expenditure level needed to restore the level of social welfare to its pre-change value. This index does not, in general, satisfy two standard index-number tests. The reversal test requires the index value for the reverse change to be the reciprocal of the original index. And the circular test requires the product of index values for successive price changes to be equal to the index value for the whole change. We show that both tests are satisfied if and only if the Bergson-Samuelson indirect social-welfare function is homothetic in prices, a condition which does not require individual preferences to be homothetic. If individual preferences are homothetic, however, stronger conditions on the Bergson-Samuelson indirect must be satisfied. Given these results, we ask whether the restrictions are empirically reasonable and find, in the case that individual preferences are not homothetic, that the restrictions make little difference to estimates of the index.
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Bibliographic InfoPaper provided by UBC Department of Economics in its series UBC Departmental Archives with number david_donaldson-2010-4.
Length: 24 pages
Date of creation: 04 Feb 2010
Date of revision: 04 Feb 2010
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social cost of living; aggregation; welfare economics;
Other versions of this item:
- David Donaldson & Krishna Pendakur, 2012. "Index-number tests and the common-scaling social cost-of-living index," Social Choice and Welfare, Springer, vol. 38(3), pages 407-429, March.
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-20 (All new papers)
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