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Welfare analysis when people are different

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  • Krishna Pendakur

Abstract

Inequality and poverty estimation (indeed, all welfare analysis) must deal with the fact that people are heterogeneous. Equivalence scales and indifference scales are tools that may be used for this. An equivalence scale gives the relative costs faced by different people; an indifference scale gives the relative cost of living for people in different types of households. Equivalence scales and indifference scales can be estimated using off‐the‐shelf household‐level consumer expenditure data and standard econometric techniques for nonlinear equation systems. I offer a short introduction to the identification, estimation and use of equivalence scales and indifference scales and argue that these are complementary tools in the analysis of inequality and poverty. The methods are illustrated with Canadian household expenditure data from the Surveys of Household Spending 2004–2009. Estimated equivalence scales for disability are presented, along with estimated household model parameters and an analysis of consumption poverty. Résumé Analyse du niveau de bien‐être quand les gens sont différents. Les mesures d’inégalité et de pauvreté (en fait toutes les mesures et analyses du niveau de bien‐être) doivent prendre en compte le fait que les gens sont hétérogènes. Les échelles d’équivalence et les échelles d’indifférence sont des outils qu’on peut utiliser pour ce faire. Une échelle d’équivalence établit les coûts relatifs auxquels les différentes personnes doivent faire face; une échelle d’indifférence établit le coût relatif différent de gens qui font partie de différents types de ménages. Les échelles d’équivalence et les échelles d’indifférence peuvent être estimées à l’aide de données sur les dépenses de consommation des ménages pour les produits et services disponibles sur le marché, et des techniques économétriques conventionnelles pour calibrer les systèmes d’équations non‐linéaires. L’auteur présente une courte introduction aux problèmes d’identification, d’estimation, et d’usage des échelles d’équivalence et des échelles d’indifférence, et propose que ce sont des outils complémentaires dans l’analyse de l’inégalité et de la pauvreté. Les méthodes sont illustrées à l’aide de données sur les dépenses des ménages canadiens fournies par les Enquêtes sur les dépenses des ménages 2004‐2009. Les échelles d’équivalence sont estimées pour l’incapacité, ainsi que les paramètres estimés du modèle des ménages et une analyse de la pauvreté en termes de consommation.

Suggested Citation

  • Krishna Pendakur, 2018. "Welfare analysis when people are different," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(2), pages 321-360, May.
  • Handle: RePEc:wly:canjec:v:51:y:2018:i:2:p:321-360
    DOI: 10.1111/caje.12335
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    Cited by:

    1. Valérie Lechene & Krishna Pendakur & Alexander Wolf, 2020. "OLS estimation of the intra-household distribution of expenditure," IFS Working Papers W20/6, Institute for Fiscal Studies.
    2. Steven F. Koch, 2023. "Basic Needs (in)Security and Subjective Equivalence Scales," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 169(3), pages 723-757, October.
    3. Stanislaw Maciej Kot, 2023. "Equivalence scales for continuous distributions of expenditure," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 185-218, March.
    4. Grodner, Andrew & Lasso de la Vega, Casilda & Salas, Rafael & Zeager, Lester A., 2022. "A local equivalence scale and its information basis," Economics Letters, Elsevier, vol. 216(C).
    5. NIKIEMA, Relwendé Apollinaire, 2024. "Intrahousehold Consumption Inequality, Economies of Scale, Indifference Scales, and Family Structure," IDE Discussion Papers 915, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    6. Wenying Li & Jeffrey H. Dorfman, 2021. "Intrahousehold Economies of Scale with Application to Food Assistance and Work Incentive Programs," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(4), pages 1251-1267, August.
    7. Calvi, Rossella & Penglase, Jacob & Tommasi, Denni & Wolf, Alexander, 2023. "The more the poorer? Resource sharing and scale economies in large families," Journal of Development Economics, Elsevier, vol. 160(C).
    8. Sarantis Tsiaplias, 2021. "The Welfare Implications of Unobserved Heterogeneity," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 67(4), pages 1029-1051, December.
    9. Bose-Duker,Theophiline & Gaddis,Isis & Kilic,Talip & Lechene,Valérie & Pendakur,Krishna, 2021. "Diamonds in the Rough? : Repurposing Multi-Topic Surveys to Estimate Individual-Level Consumption Poverty," Policy Research Working Paper Series 9661, The World Bank.

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