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Index-number tests and the common-scaling social cost-of-living index

  • David Donaldson

    ()

  • Krishna Pendakur

    ()

For 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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File URL: http://hdl.handle.net/10.1007/s00355-011-0536-3
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Article provided by Springer in its journal Social Choice and Welfare.

Volume (Year): 38 (2012)
Issue (Month): 3 (March)
Pages: 407-429

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Handle: RePEc:spr:sochwe:v:38:y:2012:i:3:p:407-429
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  1. E. T. McPHEE., 1928. "Notes," The Economic Record, The Economic Society of Australia, vol. 4(1), pages 92-95, 05.
  2. Pollak, Robert A, 1980. "Group Cost-of-Living Indexes," American Economic Review, American Economic Association, vol. 70(2), pages 273-78, May.
  3. Pendakur, Krishna, 2002. "Taking prices seriously in the measurement of inequality," Journal of Public Economics, Elsevier, vol. 86(1), pages 47-69, October.
  4. 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.
  5. Crossley, Thomas F. & Pendakur, Krishna, 2010. "The Common-Scaling Social Cost-of-Living Index," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(4), pages 523-538.
  6. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  7. Donaldson, David & Weymark, John A., 1980. "A single-parameter generalization of the Gini indices of inequality," Journal of Economic Theory, Elsevier, vol. 22(1), pages 67-86, February.
  8. Pollak, Robert A., 1981. "The social cost of living index," Journal of Public Economics, Elsevier, vol. 15(3), pages 311-336, June.
  9. Sen, Amartya, 1973. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198281931, March.
  10. repec:cup:cbooks:9780521532587 is not listed on IDEAS
  11. repec:cup:cbooks:9780521825511 is not listed on IDEAS
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