Estimate Equivalence Scales Research Articles

Semi‐parametric estimation of consumption‐based equivalence scales: the case of Germany

AbstractConsumption‐based equivalence scales are estimated by applying the extended partially linear model (EPLM) to the 1998 German Income and Consumption Survey (EVS). In this model the equivalence scales are identified from nonlinearities in household demand. The econometric framework should not therefore impose strong restrictions on the functional forms of household expenditure shares. The chosen semi‐parametric specification meets this requirement. It is flexible, it yields $\sqrt{N}$‐consistent parameter estimates and it is consistent with consumer theory. Estimated equivalence scales are below or in the range of the expert equivalence scales of the German social benefits system. Copyright © 2006 John Wiley & Sons, Ltd.

Estimates of semiparametric equivalence scales

AbstractWithin the semiparametric framework introduced by Pendakur (1999) we introduce a new loss function to estimate equivalence scales. This loss function uses all available information from the total expenditures of both the reference and nonreference households and as such it produces more reliable estimates. Using Canadian family expenditure data for 1996 we apply this loss function to obtain equivalence scale estimates for a variety of expenditure share categories such as food, fuel and clothing. Copyright © 2006 John Wiley & Sons, Ltd.

Semiparametric Estimation of Consumption Based Equivalence Scales - the Case of Germany

Consumption based equivalence scales are estimated by applying the extended partially linear model (EPLM) to the 1998 Income and Consumption Survey (EVS) carried out in Germany. In this model the equivalence scales are identified by virtue of nonlinearities in household demand. Therefore, the econometric framework should not impose any strong restrictions on the functional forms of household expenditure shares. The chosen semiparametric specification meets this requirement. It is flexible, it yields {N} consistent parameter estimates, and is consistent with consumer theory. Estimated equivalence scales are below or in the range of the expert equivalence scales of the German social benefits system.

Life Insurance and Household Consumption

In this paper, we use data of life insurance holdings by age, sex, and marital status to infer how individuals value consumption in different demographic stages. Essentially, we use revealed preference to estimate equivalence scales and altruism simultaneously in the context of a fully specified model with agents facing U.S. demographic features and with access to savings markets and life insurance markets. Our findings indicate that individuals are very caring for their dependents, that there are large economies of scale in consumption, that children are costly but wives with children produce a lot of goods in the home and that while females seem to have some form of habits created by marriage, men do not. These findings contrast sharply with the standard notions of equivalence scales.

Efficient Estimation of Semiparametric Equivalence Scales With Evidence From South Africa

We propose semiparametric procedures for estimation and testing of base-independent equivalence scales. The partial linear index specification permits simultaneous estimation across multiple household types and multiple goods and also the incorporation of continuous and discrete household attributes. Furthermore, asymptotic properties of estimated equivalence scales and tests of base independence are readily obtained. The efficiency gains from the proposed models and estimators are particularly helpful for developing country data where there is often much greater variation in household size and composition. We apply the techniques to South African data and find the results to be broadly consistent with base independence.

Equivalent-expenditure functions and expenditure-dependent equivalence scales

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.

Semi-parametric models for satisfaction with income

An overview is presented of some parametric and semi-parametric models, estimators, and specification tests that can be used to analyze ordered response variables. In particular, limited dependent variable models that generalize ordered probit are compared to regression models that generalize the linear model. These techniques are then applied to analyze how self-reported satisfaction with household income relates to household income, family composition, and other background variables. Data are drawn from the 1998 wave of the German Socio- Economic Panel. The results are used to estimate equivalence scales and the cost of children. We find that the standard ordered probit model is rejected, while some semi-parametric specifications survive specification tests against nonparametric alternatives. The estimated equivalence scales, however, are often similar for the parametric and semi-parametric specifications.

Equivalence Scales in an Intertemporal Setting with an Application to the Former West Germany

Equivalence scales provide answers to questions like how much a household with two children needs to spend compared to a couple to attain the same welfare level. These are important questions for child allowances, social benefits and to assess the cost of children over the life‐cycle for example. We discuss equivalence scales in an intertemporal setting with uncertainty. To estimate equivalence scales we use a panel from German households (GSOEP) containing subjective data on satisfaction with life and satisfaction with income to represent the welfare level. Because satisfaction is measured on a discrete scale we use limited dependent variable models for panel data in estimation. Using satisfaction with life data we find that larger households do not need any additional income to be as satisfied as a couple. Using satisfaction with income, however, yields equivalence scales that increase with household size.

Equivalence scales and consumption inequality: a study of household consumption patterns in Italy

This paper utilises unit record survey data on expenditures and incomes of Italian households of different demographic profiles to estimate consumption equivalence scales which measure the relative levels of spending required by households of different composition to attain given levels of utility. The equivalence scales have been obtained from the parameters of few alternative version of a rank 3 complete demand system with demand shifters.Among the demographic variables included in the models, the type of housing tenure and the age of children have special relevance. We have also computed the expenditure elasticities for the most common types of households and analysed how deflating expenditure with the equivalence scales affects consumption inequality among households. The analysis is developed within the framework of hypothesised utility maximising behaviour of households.

Health care and economic well-being: estimating equivalence scales for public health care utilization.

Inconsistency between the income concept and the needs associated with its use can yield seriously misleading welfare assessments in comparisons concerning different household types. Equivalence scales are typically estimated from expenditure data that make them compatible with welfare adjustments involving cash income. However, if the welfare analysis extends to economic benefits other than cash income, the equivalence scale must be adjusted to account for needs relevant to the particular form of benefit. This paper derives needs-based equivalence scales for public health care utilization. The scales are estimated from the health care utilization data of different services. In addition, redistributional analysis is used to investigate the effects of adopting various income concepts and allowing for health care needs in the equivalence scale. The results clearly reveal the conceptual importance of accounting for health status, household size and age in welfare comparisons concerning non-cash transfers. It is also shown that the redistributive effect of public health care is heavily dependent upon assumptions made about its scope.

COMPARISON OF ALTERNATIVE TAX AND TRANSFER TREATMENT OF CHILDREN USING ADULT EQUIVALENCE SCALES

This paper estimates adult equivalence scales in the context of a nonlinear demand system using cross-section individual household data. It then evaluates the treatment of children under the tax allowance and child benefit systems on the basis of the estimated equivalence scales. The results suggest that a child benefit system allowing for economies of scale in the family is consistent with the cost of children implied by the notion of adult equivalence scale.

Equivalence scales based on Subjective Income Evaluations: Are children really cheap?

SummaryAnswers of sample survey respondents to questions like the following one: “In the circumstances of your household, what income would you regard as the minimum (or good/bad/sufficient, etc.) for your household?” can be used to estimate equivalence scales. It is sometimes claimed that this is a simple and cheap method to obtain “true” equivalence scales. Typically, these scales are much flatter than those derived from consumption behaviour data, or those incorporated in official poverty lines. A number of possible reasons have been advanced for this result. Yet, using subjective data does not necessarily result in a flat equivalence scale. Equivalence scales can also be estimated from answers to direct survey questions on how satisfied the respondent is with his or her household income, and these scales are often quite steep. In this paper, an application of both methods is reported. A number of possible reasons for the discrepancy are explored. In particular, the effects of a wide range of exogenous variables are examined. Data are from the 1985 and 1988 waves of the Belgian Socio-Economic Panel, a household income survey. The conclusion is that the discrepancy between the equivalence scales persists, even when controlling for a large number of possibly intervening factors.

Bias in Estimating Equivalence Scales from Published Group Data

This paper employs a number of different aggregation procedures to assess the bias in adult equivalence scales from using published data which are inappropriately grouped and do not contain enough information about relevant household variables. The empirical analysis is based on a non-linear extension of the Almost Ideal demand system and uses 17 years of Family Expenditure Survey (UK) data. The results suggest that (i) inappropriate grouping of data can be responsible for the relatively small and insignificant equivalence scales estimated from published grouped data and (ii) this downward aggregation bias can be reinforced by the omission of relevant household variables (e.g. ownership of durables).

Identifiability of Household Equivalence Scales through Exact Aggregation: Some Empirical Results

General and commodity-specific equivalence scales are estimated with Canadian microdata. The former are identifiable when exact aggregation is imposed. However, these identifiability restrictions can be tested, as can homogeneity and symmetry in the model employed here. Exact aggregation is not rejected but homogeneity and symmetry are. The estimated equivalence scales exhibit increasing returns to scale in family size. They also rise with age, exhibit strong regional effects, and rural households' scales are generally lower than those of urban households. Since scales are sensitive to imposing homogeneity and symmetry restrictions, caution should be exercised in using such equivalence scales for policy purposes.

ARE EQUIVALENCE SCALES THE SAME FOR THE UNITED STATES AND CANADA?

This research uses microdata from the 1986 Statistics Canada Family Expenditure Survey and from the 1986–88 U.S. Consumer Expenditure Survey to estimate equivalence scales using a methodology which is very similar to that employed by Statistics Canada for the estimation of Low‐Income Cutoffs. Employing identical sample selection criteria and identically specified models, we find that equivalence scales for the two countries are not, in general, statistically different when estimated in the same way. The larger issue is then whether the two countries should choose the same methodology for the estimation of equivalence scales.

A comparison of poverty in seven European countries and regions using subjective and relative measures

This paper presents comparative results on poverty in seven countries and regions of the European Community: Belgium, The Netherlands, Luxembourg, Lorraine, Ireland, Catalonia and Greece. The data are obtained from comparable socio-economic surveys in each country. Subjective as well as relative poverty lines are used. The results indicate that the subjective poverty lines are plausible in a comparative context, although the levels of the subjective standards are rather generous. The estimated equivalence scales are much flatter than the one recommended by the OECD. The extent of poverty is much greater in the “peripheral” EC-countries than in the “central” ones. Though similar factors are found to be associated with poverty in all countries, there are also important differences in the characteristics of the poor across countries. The impact of social security transfers on poverty appears to be much smaller in the southern countries Greece and Catalonia, than in the Benelux and Lorraine.

Equivalence scales: A household production approach

The paper uses a cost minimization version of Becker's household production analysis and microdata from household expenditure and time-use surveys to estimate equivalence scales or relative costs for the intrafamily classes of adults and children in Australia for the period 1975–1976. The findings set reference standards for further research with economic welfare policy applications in Australia.

A comment on the Bardsley and McRae test for a method of estimating equivalence scales

Bardsley and McRae (1982) claim to test the method of estimating equivalence scales which was employed in McClements (1977). Using Australian data they show that, with their approach, the Theil-Goldberger restrictions virtually control the estimated scales. On the basis of these results they concluded that the method used in my paper does not provide objective estimates. From further information supplied by the authors it is clear that their approach differed in one vital respect from my earlier procedure: theoretical and practical considerations suggest that this divergence largely explains their conclusion. Bardsley and McRae’s note gives the impression that their sample consists of two reasonably homogeneous categories, namely households without children or with one child aged 5-18 years. However, the more extensive tables available from the authors show five categories were distinguished in the analysis adults aged 18-65 years (the reference group with scales of unity), children aged O-2 years, 2-5 years or 5-18 years and adults over the age of 65. In subsequent correspondence, McRae (1982) has confirmed that, within each commodity, they used identical Theil-Goldberger restrictions for all groups. In the case of the housing scale, for example, to obtain their first set of results (table 1, column 1) the same prior means (0.2) and standard errors (0.1) were postulated for all four non-reference groups. Thus, they were imposing their prior belief on the data that a child aged O-2 years and an adult over the age of 65 have identical housing needs one-fifth of the requirements for an adult aged 18-65 years. -In the case of alcohol and tobacco, the restricted mean was 10 percent of the reference adult for all child age ranges and for adults over the age of 65. I suggest that Bardsley and McRae’s results can be largely explained by two features of their methodology. First, the use of identical restrictions

A SPECIFICATION SEPARATING FAMILY SIZE AND INDIVIDUAL AGE EFFECTS ON SUBJECTIVE EQUIVALENCE SCALES: A NOTE

This paper analyses the Kapteyn and Van Praag method of estimating equivalence scales with respect to the way family size and age composition are incorporated into the scales according to rank and age of each family member. It becomes evident that the Kapteyn/Van Praag procedure fails to distinguish between household size and individual age effects with the result that personal weights can not be used for recomposition of household types other than wife and husband families, nor can they be interpreted as showing real age dependence of personal income equivalence. For these reasons another specification of the general approach, separating both effects, is outlined. This specification distinguishes between several consumption classes within each household. Within each class, economies of scale are attached to similar individuals while differences in individual need are obtained by comparing individuals with the same rank in the different classes.

Family Equivalence Scales and Personal Income Tax Exemptions for Children

T HE normative principle of horizontal equity in personal income taxation calls for the levying of equal tax liabilities on taxpaying units enjoying identical pretax levels of economic well-being. Unfortunately, the only straightforward application of this principle is the proposition that tax-paying units identical in every other relevant respect should bear equal tax burdens if and only if they enjoy the same level of pretax money income. Economists have long recognized, of course, that the level of money income is only one of several objective factors that determine a tax-paying unit's level of economic well-being its ability to pay. Probably the foremost of the other factors is the number of individuals who must share a given total money income. Economists generally accept the principle that some system of personal exemptions, deductions, tax credits or other technical devices designed to adjust gross money income for the size of the tax-paying unit is necessary to maintain horizontal equity in personal income taxation. The purpose of this paper is to evaluate the structure of personal income tax exemptions for dependent children in the present personal income tax law against the horizontal equity standard stated above.' A review of the literature reveals that this subject has received only a sparse and elementary treatment. Public finance texts go no further than to suggest the qualitative norm that relatively large families should pay somewhat less taxes than averagesize families at a given level of gross money income. A very small number of studies take an approach which we shall pursue in greater depth-the application of a large body of work in consumption economics concerned with the determination of equivalent welfare incomes or for families that differ in size and composition to a quantitative assessment of the personal income tax exemption structure.2 Unfortunately, the direct adaptation of existing equivalence scale results is inappropriate for the purposes of tax policy, as we shall demonstrate in section II of the paper. The major contribution of this study is the estimation of a new set of equivalence scales that can legitimately be applied to the evaluation of aspects of the present tax structure that are relevant to the issue of horizontal equity. Section II of the paper briefly reviews the traditional methodology for estimating equivalence scales and then proceeds to detail the conceptual and pragmatic problems involved in adapting this methodology to our particular problem. Section III presents the statistical model for estimating our new set of equivalence scales and discusses the data source for the estimates. Section IV reports our empirical results and a final, brief section V treats the policy implications of our findings.