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The social cost-of-living: welfare foundations and estimation


  • Thomas Crossley

    () (Institute for Fiscal Studies and Institute for Fiscal Studies, University of Essex)

  • Krishna Pendakur

    () (Institute for Fiscal Studies and Simon Fraser University)


We present a new class of social cost-of-living indices and a nonparametric framework for estimating these and other social cost-of-living indices. Common social cost-of-living indices can be understood as aggregator functions of approximations of individual cost-of-living indices. The Consumer Price Index (CPI) is the expenditure-weighted average of first-order approximations of each individual's cost-of-living index. This is troubling for three reasons. First, it has not been shown to have a welfare economic foundation for the case where agents are heterogeneous (as they clearly are.) Second, it uses an expenditure-weighted average which downweights the experience of poor households relative to rich households. Finally, it uses only first-order approximations of each individual's cost-of-living index, and thus ignores substitution effects. We propose a 'common-scaling' social cost-of-living index, which is defined as the single scaling to everyone's expenditure which holds social welfare constant across a price change. Our approach has an explicit social welfare foundation and allows us to choose the weights on the costs of rich and poor households. We also give a unique solution for the welfare function for the case where the weights are independent of household expenditure. A first order approximation of our social cost-of-living index nests as special cases commonly used indices such as the CPI. We also provide a nonparametric method for estimating second-order approximations (which account for substitution effects).

Suggested Citation

  • Thomas Crossley & Krishna Pendakur, 2006. "The social cost-of-living: welfare foundations and estimation," IFS Working Papers W06/10, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:06/10

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    References listed on IDEAS

    1. Eduardo Ley, 2005. "Whose inflation? A characterization of the CPI plutocratic gap," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 634-646, October.
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    4. Pendakur, Krishna, 2002. "Taking prices seriously in the measurement of inequality," Journal of Public Economics, Elsevier, vol. 86(1), pages 47-69, October.
    5. Haerdle,Wolfgang & Stoker,Thomas, 1987. "Investigations smooth multiple regression by the method of average derivatives," Discussion Paper Serie A 107, University of Bonn, Germany.
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    7. Pollak, Robert A., 1981. "The social cost of living index," Journal of Public Economics, Elsevier, vol. 15(3), pages 311-336, June.
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    Cited by:

    1. Tony Addison & Yukka Pirttilä & Finn Tarp & Carlos Felipe Balcázar & Lidia Ceriani & Sergio Olivieri & Marco Ranzani, 2017. "Rent-Imputation for Welfare Measurement: A Review of Methodologies and Empirical Findings," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63(4), pages 881-898, December.
    2. Francisco Javier Lasso, 2008. "Impacto De Los Cambios De Precios Relativos En Pobreza Y Desigualdad En Colombia: 1998-2007," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, November.

    More about this item


    Inflation; social cost-of-living; demand; average derivatives;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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