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Are Traditional Equivalence Scales Still Useful? A Review and A Possible Answer

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  • Fabrizio Balli

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    Abstract

    This paper presents a critical review of how literature on parametric equivalence scales has evolved. In particular, it focus on the issue of scale identification from consumption data and the underlying theory of household behavior. Indifference scales, defined on a supposedly more reliable approach to family consumption decision (Chiappori’s collective model), are replacing traditional equivalence scales in academic research. However, the latter remains the only available tool for tackling non-constant scale patterns with respect to expenditure, a condition empirically detected in several different countries. An implication is that studies based on traditional, but expenditure independent, equivalence scales, may lead to wrong outcomes, such as a substantial understatement of poverty measures. This is a strong reason for a realignment of operationally implemented scales towards the most recent empirical results. Finally, recent findings against the use of traditional equivalence scales are discussed and some reasons to view them as inconclusive are put forward.

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    Bibliographic Info

    Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 656.

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    Date of creation: Oct 2012
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    Handle: RePEc:usi:wpaper:656

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    Keywords: equivalence scales; equivalent expenditure; measured inequality;

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    1. Martin Browning & Pierre-Andre Chiappori, 2006. "Estimating Consumption Economies of Scale, Adult Equivalence Scales, and Household Bargaining Power," Economics Series Working Papers 289, University of Oxford, Department of Economics.
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    8. Becker, Gary S, 1981. "Altruism in the Family and Selfishness in the Market Place," Economica, London School of Economics and Political Science, vol. 48(189), pages 1-15, February.
    9. Fabrizio Balli & Silvia Tiezzi, 2010. "Equivalence scales, the cost of children and household consumption patterns in Italy," Review of Economics of the Household, Springer, vol. 8(4), pages 527-549, December.
    10. Haag, Berthold R. & Hoderlein, Stefan & Pendakur, Krishna, 2009. "Testing and imposing Slutsky symmetry in nonparametric demand systems," Journal of Econometrics, Elsevier, vol. 153(1), pages 33-50, November.
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    14. Christos Koulovatianos & Carsten Schroder & Ulrich Schmidt, 2004. "On the Income Dependence of Equivalence Scales," University of Cyprus Working Papers in Economics 1-2004, University of Cyprus Department of Economics.
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    24. Lewbel, Arthur, 1985. "A Unified Approach to Incorporating Demographic or Other Effects into Demand Systems," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 1-18, January.
    25. Fabrizio Balli & Silvia Tiezzi, 2010. "Erratum to: Equivalence scales, the cost of children and household consumption patterns in Italy," Review of Economics of the Household, Springer, vol. 8(4), pages 551-552, December.
    26. Donaldson, David & Pendakur, Krishna, 2004. "Equivalent-expenditure functions and expenditure-dependent equivalence scales," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 175-208, January.
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    31. Fabrizio Balli & Silvia Tiezzi, 2011. "Equivalence Scales Declining with Expenditure: Evidence and Implications for Income Distribution," Department of Economics University of Siena 611, Department of Economics, University of Siena.
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