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The B.E. Journal of Economic Analysis & Policy

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Volume 13, Issue 2 (Aug 2013)

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Volume 6 (2006)

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Volume 1 (2001)

Declining Equivalence Scales and Cost of Children: Evidence and Implications for Inequality Measurement

Fabrizio Balli
  • Corresponding author
  • Department of Economics and Statistics, University of Siena, Piazza San Francesco 7, Siena 53100, Italy
  • Email:
/ Silvia Tiezzi
  • Department of Economics and Statistics, University of Siena, Piazza San Francesco 7, Siena 53100, Italy
  • Email:
Published Online: 2013-08-06 | DOI: https://doi.org/10.1515/bejeap-2013-0016

Abstract

This article estimates expenditure-dependent equivalence scales for Italian couples with and without children. Following Donaldson and Pendakur (2006), the generalised absolute equivalence-scale exactness (GAESE) restrictions are incorporated into a translated quadratic almost ideal demand system. We obtain declining-with-expenditure equivalence scales, a pattern that tends to strengthen when the number of children increases. Thus, scale economies in current consumption are lower for families with poor expenditure capacities. We also show that families living in the South bear a substantial additional cost to achieve the same well-being of those living in the North. Finally, we find that ignoring the declining with expenditure pattern may involve a relevant understatement of measured inequality.

Keywords: equivalence scales; equivalent expenditure; cost of children; measured inequality

JEL classification: D12; D63

References

  • Balli, F., and S. Tiezzi. 2010. “Equivalence Scales, the Cost of Children and Household Consumption Patterns in Italy.” Review of Economics of the Household 8:527–49.

  • Banks, J., R. Blundell, and A. Lewbel. 1997. “Quadratic Engel Curves and Consumer Demand.” Review of Economics and Statistics 79:527–39. [Crossref]

  • Blackorby, C., and D. Donaldson. 1993. “Adult Equivalence Scales and the Economic Implementation of Interpersonal Comparisons of Well-Being.” Social Choice and Welfare 10:335–61.

  • Blackorby, C., and D. Donaldson. 1994. “Measuring the Cost of Children: A Theoretical Framework.” In The Measurement of Household Welfare, edited by R. Blundell, I. Preston, and I. Walker, 164–99. Cambridge: Cambridge University Press.

  • Donaldson, D., and K. Pendakur. 2004. “Equivalent-Expenditure Functions and Expenditure Dependent Equivalence Scales.” Journal of Public Economics 88:175–208. [Crossref]

  • Donaldson, D., and K. Pendakur. 2006. “The Identification of Fixed Costs from Consumer Behaviour.” Journal of Business and Economic Statistics 24:255–65. [Crossref]

  • ISTAT. 1997–2004. “Indagine sui Consumi delle Famiglie: Manuale d’uso, anno 1997–2004”. ISTAT, Roma.

  • ISTAT. 2011. “La povertà in Italia nel 2010.” Comunicato stampa, Roma, 15 luglio 2011.

  • Koulovatianos, C., C. Schroeder, and U. Schmidt. 2005a. “On the Income Dependence of Equivalence Scales.” Journal of Public Economics 89:967–96. [Crossref] [Web of Science]

  • Koulovatianos, C., C. Schroeder, and U. Schmidt. 2005b. “Properties of Equivalence Scales in Different Countries.” Journal of Economics 86:19–27. [Crossref]

  • Lewbel, A. 1989. “Household Equivalence Scales and Welfare Comparisons.” Journal of Public Economics 39:377–91. [Crossref]

  • Lewbel, A. 1997. “Consumer Demand Systems and Households Equivalence Scales.” In Handbook of Applied Econometrics, Vol. 2, edited by M.H. Pesaran, and P. Schmidt. Oxford: Blackwell Publishers.

  • Lewbel, A. 2003. “A Rational Rank Four Demand System.” Journal of Applied Econometrics 18:127–35. A corrected version is available at: http://www2.bc.edu/~lewbel/rankfour.pdf.

  • Majumder, A., and M. Chakrabarty 2010. “Estimating Equivalence Scales through Engel Curve Analysis.” In Econophysics and Economics of Games, Social Choices and Quantitative Techniques, edited by B. Basu et al. Berlin: Springer.

  • Menon, M., and F. Perali 2010. “Econometric Identification of the Cost of Maintaining a Child (Chapter 10).” In Studies in Applied Welfare Analysis: Papers from the Third ECINEQ Meeting (Research on Economic Inequality, Vol. 18), edited by J.A. Bishop, 219–55. Emerald Ltd.

  • Ministero del Lavoro e delle Politiche Sociali (2011), Rapporto ISEE 2010, Roma.

  • OECD. 2011. “What Are Equivalence Scales?” OECD-Directorate for Employment, Labour and Social Affairs, Paris. https://www.oecd.org/eco/growth/OECD-Note-EquivalenceScales.pdf

  • Perali, F. 2006. Il Costo di Mantenimento di un Bambino. In “Le Dimensioni della Povertà”, a cura di G. Rovati, Carocci Editore.

  • Shonkweiler, J.S., and S. Yen 1999. “Two-Step Estimation of a Censored System of Equations.” American Journal of Agricultural Economics 81:972–82. [Crossref]

About the article

Published Online: 2013-08-06


The index of equivalent economic situation (ISEE). In 2009 nearly 30% of Italian residents applied for social benefits awarded on the basis of the ISEE (Ministero del Lavoro e Politiche Sociali 2011).

Donaldson and Pendakur (2006) handle a wider range of household types (i.e. couples with any number of children) using fewer parameters by imposing a specific functional structure.

ISTAT delivers monthly price indexes for the provinces, a more disaggregated geographical level than the administrative region. To match with expenditure data, where only the household’s region is known, we take the prices of the province corresponding to the regional capital and consider them as representative of the whole region.

The reference person (RP) is the holder of the file recorded in the household register handled by each Italian municipality.

We set rather than estimate the intercept of the translog price index log a(p,z), which is difficult to identify, at the average log total expenditure of the reference household. All parameter estimates are available from the authors upon request.

These authors computed different values for couples with a child in distinct age ranges (the childless couple is the reference). They obtained the following values: 1.19 for a child between 0 and 5 years old; 1.16 for a child between 6 and 13; 1.18 for a child between 14 and 18.

Differences between values calculated by these authors at the top and the bottom vigintile of the annual current expenditure distribution are −0.10, −0.13 and −0.15 for households with zero, one and three children, respectively. They consider vigintiles from conditional distributions; in this work deciles are taken from the joint distribution.

With respect to the older RP sample, in the younger RP subsample couples with three children are less represented and not evenly distributed over time and across geographical areas.


Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2013-0016. Export Citation

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