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Index-number tests and the common-scaling social cost-of-living index

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  • David Donaldson
  • Krishna Pendakur

Abstract

For a change in prices, the common-scaling social cost-of-living index is the equal scaling of every individual's expenditure level needed to restore the level of social welfare to its pre-change value. This index does not, in general, satisfy two standard index-number tests. The reversal test requires the index value for the reverse change to be the reciprocal of the original index. And the circular test requires the product of index values for successive price changes to be equal to the index value for the whole change. We show that both tests are satisfied if and only if the Bergson-Samuelson indirect social-welfare function is homothetic in prices, a condition which does not require individual preferences to be homothetic. If individual preferences are homothetic, however, stronger conditions on the Bergson-Samuelson indirect must be satisfied. Given these results, we ask whether the restrictions are empirically reasonable and find, in the case that individual preferences are not homothetic, that the restrictions make little difference to estimates of the index.
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Suggested Citation

  • David Donaldson & Krishna Pendakur, 2012. "Index-number tests and the common-scaling social cost-of-living index," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(3), pages 407-429, March.
    • Handle: RePEc:spr:sochwe:v:38:y:2012:i:3:p:407-429
    DOI: 10.1007/s00355-011-0536-3
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    1. David Donaldson & Krishna Pendakur, 2012. "Index-number tests and the common-scaling social cost-of-living index," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(3), pages 407-429, March.
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    1. David Donaldson & Krishna Pendakur, 2012. "Index-number tests and the common-scaling social cost-of-living index," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(3), pages 407-429, March.
    2. Rodrigo Lluberas, 2018. "Life‐Cycle Expenditure and Retirees’ Cost of Living," Fiscal Studies, John Wiley & Sons, vol. 39(3), pages 385-415, September.
    3. Ingvild Almås & Anders Kjelsrud, 2016. "Pro-poor Price Trends and Inequality - The Case of India," CESifo Working Paper Series 5740, CESifo.
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    5. Almås, Ingvild & Kjelsrud, Anders, 2017. "Rags and Riches: Relative Prices, Non-Homothetic Preferences, and Inequality in India," World Development, Elsevier, vol. 97(C), pages 102-121.

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    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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