EquivalenceversusIndifference Scales

Abstract

Comparing income levels across families with different composition is a central issue for most welfare indicators and policies. Currently, the dominant method relies on income‐based equivalence scales, which raise a host of theoretical, empirical and normative difficulties. However, a new approach, based on the notion of indifference scales, avoids most of these problems, while leading to empirically tractable estimation methods. I submit that time has come to abandon the traditional view in favour of the new concept.

A Sharing Model of the Household: Explaining the Deaton-Paxson Paradox and Computing Household Indifference Scales

“…This section presents a method to estimate household indifference scales, defined as the amount of money a person should receive to attain the same indifference curve as that arising from an additional household member (Browning et al (2013), Dunbar et al (2013), Chiappori (2016)). The concept of indifference scales is theoretically and empirically less demanding that the traditional income-based economies of scale, which is defined as the amount of money a person/family should receive to attain the same utility as that arising from an additional household member.…”

Identifying tax implicit equivalence scales

“…Chiappori [3], Section 1): the focus on family rather than individual specific utilities; the assumption that family preferences are fully defined by a family's characteristics; and the assumption of a strong version of interpersonal comparison of utilities that applies both within and between families.…”

“…The modified OECD scale, first proposed by Hagenaars et al [7], is one such measure. 3 Although stylised scales tend to be highly transparent, they also provide a restrictive description of the relative needs of heterogeneous tax units, which suggests a need for associated sensitivity analysis. This points to the usefulness of an identification approach for equivalence scales that differs substantively from those applied in the established literature.…”

“…2 See also the influential critique of demand based equivalence scales by Blundell and Lewbel [4]. 3 The modified OECD scale is based upon "expert opinion"; see Orshansky [8] for a comparable scale also based on expert opinion. contexts.…”

Individual Welfare Analysis for Collective Households

“…Such a non-unitary approach to modeling households' consumption behavior is particularly relevant for the analysis of individual welfare, as it naturally allows us to account for the possibility of an unequal distribution of resources and welfare within households. See, for example, Chiappori and Meghir (2014) and Chiappori (2016) for extensive argumentation. A main distinguishing feature of our method is that it builds on a revealed preference characterization of the collective model that is intrinsically nonparametric (in the tradition of Afriat (1967), Diewert (1973) and Varian (1982)).…”