Direct Estimation of Equivalence Scales

We explore a direct approach to estimating household equivalence scales from income satisfaction data. Our method differs from previous approaches to using satisfaction data for this purpose in that it can be used to directly estimate and evaluate equivalence scales of any desired form. It can also be employed to investigate specific questions related to equivalence scales such as whether these scales are income-dependent or to what extent they depend on specific household characteristics (e.g. whether some household members are in a partner relationship). Our approach yields plausible equivalence scales that have somewhat higher economies of scale than those assumed in the commonly used modified OECD or the square-root scale. We test GESE and GAESE restrictions on equivalence scales (Donaldson/Pendakur, 2003, 2006) and investigate in detail to what extend equivalence scales are income-dependent. Our results indicate that income dependence may differ fundamentally across household types.