Durable goods and welfare measurement

Abstract

AbstractThe paper focuses on durable goods and their role in the measurement of living standards. The contribution of the paper is fourfold. First, we develop a unified framework to discuss the theoretical underpinnings of the methods used by welfare analysts to calculate the value of the services flowing from consumer durable goods—the acquisition approach, the rental equivalent approach, the user cost approach, and the opportunity cost approach. We conclude by endorsing the user cost approach. Second, we propose a new method to implement the user cost approach, dubbed the “economic life” depreciation model, which can be estimated with limited information, combining theoretical and practical advantages. Third, we examine some 200 official poverty assessment reports the world over, released between the early 2000s and the present day, and we document the gulf between theory and practice: overall, we find that the way durable goods are dealt with in welfare analysis is still highly inadequate. Fourth, we sketch a simple analytical framework to assess the distributional impact of different methods to estimate the consumption flow from durables. The main predictions of the model are tested using the 2012 Iraqi Household Income and Economic Survey.