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The price and utility dependence of equivalence scales: Evidence from Indonesia

Author

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  • de Ree, Joppe
  • Alessie, Rob
  • Pradhan, Menno
Abstract
The purpose of this research is to estimate equivalence scales and evaluate their price and utility dependencies. To do this we unify two strands of the empirical literature on this topic, one that relies on demand data and one that relies on subjective evaluations of wellbeing. This way we are able to employ the strengths of both kinds of information. Equivalence scales are not identified from demand data alone. This is because changes in demographics could affect wellbeing directly, i.e., in ways that are not revealed by changes in behavior. The demand-based literature rules out such effects a priori and restricts parameters that measure them. In this paper we do not rely on such restrictions and instead use subjective evaluations of wellbeing as an additional source of information. Because demand data are highly informative about some of the other parameters of the model its use increases efficiency. This becomes critical once we specify complex preference structures that allow for the equivalence scale's dependence on price and utility. Our model nests the typical models used in the subjective and the demand literature and we are able to test down both kinds. We find evidence for direct utility effects. This rejects the validity of some of the restrictions applied by the demand literature within the Indonesian context. We estimate equivalence scales that are of reasonable magnitude and decrease in utility. We also find that the scales increase in the food to nonfood price ratio for poor households, whereas we do not find price dependence for more affluent households.

Suggested Citation

  • de Ree, Joppe & Alessie, Rob & Pradhan, Menno, 2013. "The price and utility dependence of equivalence scales: Evidence from Indonesia," Journal of Public Economics, Elsevier, vol. 97(C), pages 272-281.
    • Handle: RePEc:eee:pubeco:v:97:y:2013:i:c:p:272-281
    DOI: 10.1016/j.jpubeco.2012.09.006
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    Cited by:

    1. 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.
    2. Justin van de Ven & Nicolas Hérault, 2019. "The evolution of tax implicit value judgements, redistribution and income inequality in the UK: 1968 to 2015," Working Papers 498, ECINEQ, Society for the Study of Economic Inequality.
    3. Morawski Leszek & Domitrz Adrian, 2017. "Subjective Approach to Assessing Poverty in Poland – Implications for Social Policy," Statistics in Transition New Series, Statistics Poland, vol. 18(3), pages 501-520, September.
    4. DECANCQ, Koen & FLEURBAEY, Marc & SCHOKKAERT, Erik, 2014. "Inequality, income, and well-being," LIDAM Discussion Papers CORE 2014018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Jolliffe, Dean & Baah, Samuel Kofi Tetteh, 2024. "Identifying the poor – Accounting for household economies of scale in global poverty estimates," World Development, Elsevier, vol. 179(C).
    6. Bart van Leeuwen & Rob Alessie & Jochem de Bresser, 2021. "Household Composition and Preferences: A Collective Approach to Household Consumption," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 67(3), pages 591-615, September.
    7. Leszek Morawski & Adrian Domitrz, 2017. "Subjective Approach To Assessing Poverty In Poland – Implications For Social Policy," Statistics in Transition New Series, Polish Statistical Association, vol. 18(3), pages 501-520, September.
    8. Kunta Nugraha & Phil Lewis, 2013. "Towards a better measure of income inequality in Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 49(1), pages 103-112, April.
    9. Rapp, Severin, 2023. "Wealth distribution and household economies of scale: Do families matter for inequality?," Department of Economics Working Paper Series 336, WU Vienna University of Economics and Business.
    10. Justin Ven & Nicolas Hérault & Francisco Azpitarte, 2017. "Identifying tax implicit equivalence scales," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 15(3), pages 257-275, September.
    11. John Bishop & Andrew Grodner & Haiyong Liu & Ismael Ahamdanech-Zarco, 2014. "Subjective poverty equivalence scales for Euro Zone countries," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 12(2), pages 265-278, June.
    12. Severin Rapp, 2023. "Wealth distribution and household economies of scale: Do families matter for inequality?," Department of Economics Working Papers wuwp336, Vienna University of Economics and Business, Department of Economics.
    13. Newhouse, David & Suárez Becerra, Pablo & Evans, Martin, 2017. "New global estimates of child poverty and their sensitivity to alternative equivalence scales," Economics Letters, Elsevier, vol. 157(C), pages 125-128.
    14. Justin van de Ven & Nicolas Herault & Francisco Azpitarte, 2014. "Identifying Tax Implicit Equivalence Scales," Melbourne Institute Working Paper Series wp2014n03, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    15. Li, Lianyou & Song, Ze & Ma, Chao, 2015. "Engel curves and price elasticity in urban Chinese Households," Economic Modelling, Elsevier, vol. 44(C), pages 236-242.
    16. Christian Dudel & Jan Marvin Garbuszus & Notburga Ott & Martin Werding, 2015. "Income Dependent Equivalence Scales, Inequality, and Poverty," CESifo Working Paper Series 5568, CESifo.
    17. Grottera, Carolina & Barbier, Carine & Sanches-Pereira, Alessandro & Abreu, Mariana Weiss de & Uchôa, Christiane & Tudeschini, Luís Gustavo & Cayla, Jean-Michel & Nadaud, Franck & Pereira Jr, Amaro Ol, 2018. "Linking electricity consumption of home appliances and standard of living: A comparison between Brazilian and French households," Renewable and Sustainable Energy Reviews, Elsevier, vol. 94(C), pages 877-888.
    18. Balint Menyhert, 2024. "Absolute Poverty Measurement with Minimum Food Needs: A New Inverse Method for Advanced Economies," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 174(1), pages 313-351, August.
    19. Biewen, Martin & Juhasz, Andos, 2013. "A Goodness-of-Fit Approach to Estimating Equivalence Scales," IZA Discussion Papers 7209, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Equivalence scales; Independence of base; Consumer demand; Subjective wellbeing;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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