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A Goodness-of-Fit Approach to Estimating Equivalence Scales

  • Biewen, Martin

    ()

    (University of Tuebingen)

  • Juhasz, Andos

    ()

    (University of Tuebingen)

We use income satisfaction data in order to estimate equivalence scales. Our method differs from previous attempts to use satisfaction data for this purpose in that it can be used to estimate or evaluate any given parametric equivalence scale. It can also be employed to investigate specific questions related to equivalence scales such as whether these scales are income-dependent or to what extent they depend on specific household characteristics such as whether some household members are in a partner relationship. A further advantage of our approach is that, within a first-differencing nonlinear least-squares framework, we can carry out full statistical inference about the hypotheses under consideration. Our empirical results suggest that household economies of scale are higher than those assumed in commonly used scales such as the OECD or the Luxembourg scale. We also obtain the novel empirical result that economies of scale may decrease (rather than increase) in income, which is what one would expect if the share of consumption goods generating economies of scale (such as housing) decreases with income.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7209.

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Length: 34 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7209
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  1. Daniel W. Sacks & Betsey Stevenson & Justin Wolfers, 2010. "Subjective Well-Being, Income, Economic Development and Growth," NBER Working Papers 16441, National Bureau of Economic Research, Inc.
  2. Banks, James & Johnson, Paul, 1994. "Equivalence Scale Relativities Revisited," Economic Journal, Royal Economic Society, vol. 104(425), pages 883-90, July.
  3. van Praag, Bernard M. S., 1991. "Ordinal and cardinal utility : An integration of the two dimensions of the welfare concept," Journal of Econometrics, Elsevier, vol. 50(1-2), pages 69-89, October.
  4. Ada Ferrer-i-Carbonell & Paul Frijters, 2004. "How Important is Methodology for the estimates of the determinants of Happiness?," Economic Journal, Royal Economic Society, vol. 114(497), pages 641-659, 07.
  5. Arthur Lewbel & Krishna Pendakur, 2008. "Estimation of Collective Household Models With Engel Curves," Boston College Working Papers in Economics 694, Boston College Department of Economics.
  6. David G. Blanchflower & Andrew J. Oswald, 2000. "Well-Being Over Time in Britain and the USA," NBER Working Papers 7487, National Bureau of Economic Research, Inc.
  7. Pashardes, Panos, 1995. "Equivalence scales in a rank-3 demand system," Journal of Public Economics, Elsevier, vol. 58(1), pages 143-158, September.
  8. Richard Layard & Guy Mayraz & Stephen Nickell, 2007. "The Marginal Utility of Income," CEP Discussion Papers dp0784, Centre for Economic Performance, LSE.
  9. Lewbel, Arthur, 1989. "Household equivalence scales and welfare comparisons," Journal of Public Economics, Elsevier, vol. 39(3), pages 377-391, August.
  10. repec:ner:tilbur:urn:nbn:nl:ui:12-361896 is not listed on IDEAS
  11. repec:dgr:kubcen:200287 is not listed on IDEAS
  12. Charles Bellemare & Bertrand Melenberg & Arthur van Soest, 2002. "Semi-parametric models for satisfaction with income," CeMMAP working papers CWP12/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  13. Christopher R. Bollinger & Cheti Nicoletti & Stephen Pudney, 2012. "Two can live as cheaply as one... But three's a crowd," Discussion Papers 12/23, Department of Economics, University of York.
  14. Bargain, Olivier & Donni, Olivier, 2012. "Expenditure on children: A Rothbarth-type method consistent with scale economies and parents' bargaining," European Economic Review, Elsevier, vol. 56(4), pages 792-813.
  15. Johannes Schwarze, 2003. "Using Panel Data on Income Satisfaction to Estimate Equivalence Scale Elasticity," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 49(3), pages 359-372, 09.
  16. 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.
  17. Richard Blundell & Alan Duncan & Krishna Pendakur, 1998. "Semiparametric estimation and consumer demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(5), pages 435-461.
  18. Stefan Boes & Rainer Winkelmann, 2010. "The Effect of Income on General Life Satisfaction and Dissatisfaction," Social Indicators Research, Springer, vol. 95(1), pages 111-128, January.
  19. Andos Juhász, 2012. "A Satisfaction-Driven Poverty Indicator: A Bustle around the Poverty Line," SOEPpapers on Multidisciplinary Panel Data Research 461, DIW Berlin, The German Socio-Economic Panel (SOEP).
  20. de Ree, Joppe & Alessie, Rob & Pradhan, Menno, 2013. "The price and utility dependence of equivalence scales: Evidence from Indonesia," Journal of Public Economics, Elsevier, vol. 97(C), pages 272-281.
  21. Muellbauer, John, 1980. "The Estimation of the Prais-Houthakker Model of Equivalence Scales," Econometrica, Econometric Society, vol. 48(1), pages 153-76, January.
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