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A Goodness-of-Fit Approach to Estimating Equivalence Scales

Author

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  • Biewen, Martin

    () (University of Tuebingen)

  • Juhasz, Andos

    () (University of Tuebingen)

Abstract

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.

Suggested Citation

  • Biewen, Martin & Juhasz, Andos, 2013. "A Goodness-of-Fit Approach to Estimating Equivalence Scales," IZA Discussion Papers 7209, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7209
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    More about this item

    Keywords

    nonlinear least squares; economies of scale; income satisfaction;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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