Equivalent-expenditure functions and expenditure-dependent equivalence scales

Abstract

This paper presents and investigates a new class of equivalent-expenditure functions that is a generalization of the one that corresponds to exact (independent-of-base) equivalence scales. It provides less restrictive household demands, especially for children’s goods, and has associated equivalence scales that may depend on expenditure. We show that, under certain conditions, equivalent-expenditure functions and the associated expenditure-dependent equivalence scales can be uniquely estimated from demand data. We estimate them using Canadian data and find that the resulting scales are both plausible and expenditure dependent. The estimated equivalence scales for households with children decline significantly as expenditure increases.