Informational Content of Equivalence Scales Based on Minimum Needs Income

Abstract

Uniform equivalence scales are routinely used for welfare comparisons and require that utility function is IB/ESE (independent of base/equivalent scale exact). This condition itself requires restrictions on the level of measurability and interpersonal comparability of preferences across households, so called informational basis, in that welfare ordering must be Ordinal and Fully Comparable (OFC). We show that if one calculates equivalence scale at particular utility level, for example households living in poverty, the informational basis is much weaker and requires full comparability only at a single point. For this purpose we introduce the axiom of Ordinal Local Comparability (OLC) and show that equivalence scale based on Minimum Needs Income is consistent with that axiom. We argue that subjective equivalence scale using the intersection method offers practical application of equivalence scale consistent with OLC.