Estimating Costs of Children from Micro-Unit Records: A New Procedure Applied to Australian Data

Abstract

Measuring the costs of children is of immense practical importance in a range of economic and social policy areas. In this paper, we introduce a new econometric procedure that improves on existing methods for obtaining estimates of such costs from a demand system. We develop, using an extended linear expenditure system, an iterative maximum likelihood estimator that overcomes possible estimation problems that arise from the 2-step estimation procedures employed by earlier authors. We also allow for a more general assumption about the equation “errors”, that of non-zero correlation between the errors for different commodities in the same household. Another important contribution is the development of an estimation procedure for sets of seemingly unrelated regressions where the different sets of equations are linked by some common parameters. The proposed procedure is applied to the 1988–89 and 1993–94 Australian Household Expenditure Surveys and results obtained update estimates of both the commodity-specific and general scales previously obtained for Australia.