Income poverty measurement in India: defining group-specific poverty lines or taking preferences into account?

Abstract

We study absolute income poverty measurement when households differ in preferences and face different prices. The difficulty arising from price heterogeneity is typically solved using equivalent income, but the choice of the reference price vector remains arbitrary. We provide a way to solve this arbitrariness problem by making the poverty measure consistent with preferences: a household qualifies as poor if and only if she prefers the poverty line bundle to her current consumption bundle. We then prove that defining group/region specific poverty lines is another way of recovering consistency with preferences, provided one uses the headcount ratio. Comparing the resulting three approaches using Indian data, we show that the different approaches lead to different poverty conclusions. We find that not taking preferences into account leads to severely underestimating urban poverty.