Elsevier

European Economic Review

Volume 35, Issue 6, August 1991, Pages 1277-1293
European Economic Review

Cost of characteristics indices and household equivalence scales

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Abstract

The ratio of cost functions of demographically different households is a true cost of (demographic) characteristics index. This index is independent of a base level of income or utility (IB) if and only if it equals a ratio of household equivalence scales that are themselves IB. This paper analyzes the restrictions on cost functions and commodity specific equivalence scales required for the existence of IB scales and indices. Since scales can be price dependent, the restrictions on behavior are far less severe than for ordinary Engel style household scales. Connections between IB scales and other techniques for incorporating demographic effects into demand systems are described.

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      The so-called ‘independent of the base’ (IB) assumption refers to the fact that the scale is independent of the base expenditure – and, hence, of the utility level – at which it is evaluated. This assumption is similar to the IB restriction in the equivalence scale literature (Blackorby and Donaldson, 1993; Lewbel, 1991), but it concerns individual utility functions rather than aggregated household utility functions. The scaling functions si,n(p,z) may depend on all the individual characteristics of the persons living in the household and on the vector of prices.9

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    Portions of this research were done while the author was visiting the MIT Sloan School. This research was funded in part by the National Science Foundation, through grant number SES-8712787. I would like to thank Dale Jorgenson for suggesting this line of research and for his valuable comments and suggestions. Any errors are my own.

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