Table Of ContentHousehold Behaviour, Equivalence Scales,
Welfare and Poverty
Contributions to Statistics
V.FedorovlW.G.MUlier/I.N.Vuchkov (Eds.) S. Biffignandi (Ed.)
Model-Oriented Data Analysis, Micro- and Macrodata of Firms,
XII/248 pages, 1992 XII/776 pages, 1999
J.Antoch (Ed.) W Hardle/Hua Liang/J.Gao
Computational Aspects of Model Choice, Partially LinearModels,
VII/285 pages, 1993 XI203 pages, 2000
WG. MUlIerlH.P.Wynn/A.A. Zhigljavsky WG. MUlier
(Eds.) Collecting Spatial Data
Model-Oriented Data Analysis, 2ndedition
XIII1287pages, 1993 XIlII96 pages,200I
P.Mandl/M.Huskova (Eds.) A.C. Atkinson/P.Hackl/W.G.Muller(Eds.)
Asymptotic Statistics, mODa 6- Advances in Model-Oriented
X/474 pages, 1994 Design and Analysis
XVI/283 pages, 200I
P.Dirschedl/R. Ostermann (Eds.)
Computational Statistics, C. Lauro/J.AntochN. Esposito Vinzi/
VII/553 pages, 1994 G. Saporta (Eds.)
Multivariate TotalQuality Control
C.P. Kitsos/WG.MUlier(Eds.) XIII1236pages, 2002
MODA 4- Advances inModel-Oriented
Data Analysis, P.-A.Monney
XIV1297pages, 1995 AMathematical Theory of Arguments
for StatisticalEvidence
H.Schmidli XIII/l54 pages, 2003
Reduced Rank Regression,
X/179 pages, 1995 Y. HaitovskylH.R.LercheIY.Ritov (Eds.)
Foundationsof Statistical Inference
W Hardle/M.G. Schimek (Eds.) XII/230 pages, 2003
StatisticalTheory and Computational
Aspects of Smoothing,
VIII1265pages, 1996
S. Klinke
Data Structures for ComputationalStatistics,
VIII1284pages, 1997
A.C. AtkinsonlL. PronzatolH.P.Wynn
(Eds.)
MODA 5- Advances inModel-Oriented
Data Analysis and Experimental Design,
XIV/300 pages, 1998
M.Moryson
Testing forRandom WalkCoefficients in
Regression and State Space Models,
XV/317pages, 1998
Camilo Dagum . Guido Ferrari
(Editors)
Household Behaviour,
Equivalence Scales,
Welfare and Poverty
With 31 Figures and 70 Tables
Springer-Verlag Berlin Heidelberg GmbH
Series Editors
Wemer A. Miiller
Martina Bihn
Editors
Professor Camilo Dagum
Dipartimento di Scienze Statistiche "P. Fortunati"
Universita di Bologna
Via Belle Arti, 41
40126 Bologna
Italy
[email protected]
Professor Guido Ferrari
Dipartimento di Statistica "G. Parenti"
Universita di Firenze
Viale Morgagni, 59
50134 Firenze
Italy
[email protected]
ISSN 1431-1968
ISBN 978-3-7908-0108-8 ISBN 978-3-7908-2681-4 (eBook)
DOI 10.1007/978-3-7908-2681-4
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Foreword
A group of scholars converging on a common and socially relevant economic
theme of research, that of households' welfare and poverty, met several times in
the last two years todiscuss the research progress and the opportunity tobring to
getherforpublication theresearch sofaraccomplished.
They shared a research project supported by a grant from the former Italian
Ministero dell'Universitaedella Ricerca ScientificaeTecnologica (MURST) now
Ministero dell'Istruzione, dell'Universita e della Ricerca (MIUR): The Equiva
lence Scales in the Measurement ofHouseholds' Welfare: Statistical, Economic
and DemographicAnalysis.The decisive meeting,an international seminar onthe
topics, washosted bythe University ofFlorence, siegeofthe nationalcoordinator
ofthisproject.
When one think of Florence, itis inevitable to think of the unfolding of Ren
aissance, andreciprocally.
To the eyesof a traveller whohad arrived toFlorence inthe 15th century, the
city would have appeared as a sort of El Dorado, similarly to what would have
occurred tothefirstconquerors oftheSouthAmerica'slands,somuchastonishing
weretherichness ofartsandtheopulence oflife.
The flourishing ofpainting and sculpture had notequal allover theworldand
was reaching tops never made equal before. Masaccio, Brunelleschi, Donatello
and later on Leonardo and Michelangelo, were the artistic and intellectual genius
thatenlightened beautyloversprinces.....
The musicwasjustborn and wasunfoldingitsfirsteffectsandeventhescien
tific research was accomplishing its first steps, through the conception, then first
taking form, of the depiction of the still life as a scientific representation of the
natureandhenceasaformofknowledgeandnotonlyoneofartisticpicture.
The bankers were among the most prominent and the richest in Europe, so
much as to lend money to kings. They were so active and their turnover was so
relevant to induce the need for understanding the mechanisms underlying the ex
changes andtheeconomic operations betterthanbefore, aswellastoelaborate the
more adequate technical procedures to conduct and register transactions. It is in
this context that sets, for instance, the invention of the bill of exchange and Luca
Pacioli double entry accounting, so that one could affirm that the economics and
firmaccounting systemwereborn inthoseexceptionallydynamicsyears.
The life was at the top of the dynamism and the Renaissance was involving
notonlyarts,butnearlyeveryaspectsoflife.
To the eyes of our traveller, nothing would have appeared farther away from
inequality in wealth distribution, welfare and poverty. However, the richness was
indeed highlyunequallydistributed andthejoy oftheimmensebeauties andofthe
well-being that were being produced by great artists, bankers and dealers was
sharedbyratherafewhouseholds.
The inequality in the distribution of wealth was very high and poverty was
very large in proportion of the total population. Moreover, there didn't exist any
VI Foreword
form ofeconomic and social support or protection infavour ofthe poorest house
holds.
There was not in the Florence of Renaissance a "social" consciousness of the
extreme lack of equity in the distribution of wealth. Too strong was the religious
perception of theinevitability oftheinequality and ofitsovercoming onlythrough
charity and sacrifice.Giotto, more thanahundred years before, had expressedthis
asametaphor inthe wonderful painting of SanFrancesco whostripshimselfofall
his possessions to give them to the poor. So, there was not, and itcould not have
been conceived, any subsequent political action (the good government, with its
Lorenzetti's allegory is far away and not only geographicallyl), even though in
this city more than in many other places, the huge riches possessed by the few
wereinaharshcontrast withthegreat poverty ofthemany.
From Florence, the Renaissance ofarts and of lifeitselfradiated to the rest of
Italy and to Europe, together with a model of society where the wealth was much
unequally distributed and the power and welfare were the privilege of a small
"aristocratic" minority.
Then, by the end of the XV-th Century, the discovery of America caused the
decline of theMediterraneansea and of theeconomies ofthecountries thatlooked
out on it. The paths of development moved towards other countries and the ine
qualities existing in the social and economic life of Florence was consequently
evenaccentuated.
The decline of the city wasnot noticed soon, but ithad begun, and withit,its
social, economic and artistic life. After the magnificent period of Renaissance,
Florence entered inalong period ofdecadence thatdid notstop untiltoday.
One might see an ideal continuity, a sort of a long and fine line that links the
above outlined world to the above research project shared byfive Italian universi
ties, Florence,Bologna, Verona,Roma andMessina.The outcome of thisresearch
project were presented and discussed, along with the papers of other prominent
specialists, intheInternationalSeminaronEquivalenceScales,HouseholdBehav
iour and Welfare held in Florence in the Summer of 2002, quoted at the begin
ning.The final revision of these papers are now being published in this book un
der thetitle HouseholdBehaviour, EquivalenceScales,Welfare andPoverty.
Born in Florence, the project attracted the interest of other Italian research
centres, benefiting from the valuable contribution of excellent university research
groups and the participation of distinguished scholars from other countries of the
oldEurope (old inhistory,civilization,culture, arts and sciences) and beyond. For
the countries of the old Europe, that ideal continuity appears quite natural. For
those of the new and very new worlds, it is in the order of events, as it is the
emerging of the new frontier that have involuntarily caused the decline and the
impoverishment of Florence and the Mediterranean, decidedly contributing to the
worseningofthealreadyexisting unequal welfaredistribution problems.
Thus, the highly unequal income, welfare and wealth distributions, and the
high level of poverty of the then shining Florence, ideal capital city of the old
world of the XV-thCentury, are the problems of theFlorence of today, and ofthe
oldandthe newworld.
Foreword Vll
This is the time of globalisation and of the new economy, which links the
economic problems of the ones here to the economic problems of the ones there,
inanetofrelationships moreandmore interrelated, interdependent andhighlyun
equal.
In these time,tremendous changes inthe worldorganisation ofeconomic, so
cial and financial structure and functioning, including the labour market, are tak
ingplace.They areheavilyaffectingthelifeofmillionofpeople andmakeitmore
thanever worthdiscussing theproblems ofhousehold welfare,incomedistribution
andpoverty.
But, to the eyes oftoday's million visitors andtravellers whocrowd Florence
to enjoy its beauty and arts, likewiseto those ofour travellers ofthe Renaissance,
nothing might appear farther away from wealth distribution inequality, welfare
problems,andpoverty.
The above international seminar was held in Florence, where the research
project was born. Quite paradoxically, inthecitythat- asappeared to theeyesof
thetraveller ofthe Renaissance and stillappears totheeyesoftoday's travellers
seemsclearly far awayfrom the problems discussed inthe seminar.Allpermeated
as is still today bythat ethereal and perfect beauty conferred to itby the immortal
art that pervades everything, that seems to set it apart and out it out of any con
crete problem, to make it nearly a symbol of an ideal world where everything is
waddedbyartanddevoid ofsocialandeconomicconflicts.
So, it might seem that there is a sort of contradiction between the arguments
dealt withintheseminarandthecityofFlorence, asortofincommunicability.But
it is not like this;on the contrary, it isjust the play of this apparent contradiction
that makes itmore pregnant themeaningoftheseminar andgives to itsplacing in
Florence nearlythesignoftheunavoidability.
The fiveresearch groups havebeen workingfor morethantwoyears.The pa
pers presented are very well integrated with the papers of the invited "external"
contributors. Although they didn't take part directly in this project, they are pro
minentinthefield.
In fact, the Italian research groups represented by the above five universities
have been joined by distinguished foreign researchers working in the same area.
They haveaccepted topresent theirpapers totheseminar andtoparticipate inthe
discussion of all of them, thus conferring to the research theme a more universal
character, worthy of the city that has hosted them.Their contributions represent a
welcomeenrichment, astestified bythepapers thatappear inthepresent volume.
The two yearduration of the project wasanything but a chance.It wasareal
challenge because it tested the willof the groups involved in it to deeply explore
theintricaciesofthetopicseachofthemchoosetoanalyse.
Following the first idea of quantitatively studying the problems of equiva
lence scales applied toincome distribution, welfareandpoverty measurement, and
making use of micro-data bases taken from Household Budget Surveys, the re
search groups composed by Economists, Statisticians and Econometricians from
the universities of Bologna, Verona, Roma and Messina, joined the group from
theuniversity ofFlorence topursue furtherthisimportant socio-economic andsta
tisticalresearch project.
viii Foreword
The topics object of inquiry look a somewhat wide. Bologna dealt mainly
with the study of uni-dimensional and multi-dimensionalapproaches to the anal
ysis and measurement of poverty, their policy implications, the welfare compari
sons among households, the application of thefuzzyset theory, and proposals for
new personal and household income distribution models. Messina analysed the
effects oftheparent timeonchildrencosts,discussedtheimpactofmaking endo
genous the choice of having a child on the econometric identification of the mo
dels, studied thecost ofraising achildanditsrelated livingconditions anddemo
graphic implications of household decisions. Rome investigated the wayin which
the basic interpersonal comparisons of independence of scales on the choice of
utilityor income levels are dictated byeconomic reasons rather thanbyempirical
evidences. Florence studied the production of equivalence scales for the estima
tion of the cost of additional components by age class and for household welfare
comparisons by sub-areas. This brief outline testifyabout the pluridisciplinary re
quirementandmultidimensionalscopeofthisresearchproject.
The papers collected in this volume include the research of the five Italian
universitiesand of theexternal researchers inthefieldofhousehold welfare,pov
erty and well-being.Therefore, theydeal withequivalence scales and their use in
crucialresearchfieldssuchashouseholdwelfareandpovertymeasurement.
We nowpresent a brief outline of the content of the book to offer a reading
guideandthebookmainachievement.Thepapersareorderedaccordingtoatheo
retico-methodological structure to offer a better continuity to the readers, and in
thatorderwepresenttheauthors' scopeandoutcomes.
Equivalence scales as such, their economic foundations and their methodolo
gical problems are discussed inthepaper Equivalence Scales Based on Collecti
ve Household Models, by Arthur Lewbel. This isa lucid and veryadvanced fol
lowup of apaper writtenby thisauthor incollaboration withP. A.Chiappori and
M.Browning.The author deals withthespecificationofcollectivemodelsofhou
sehold behaviour to overcome theidentificationproblemsassociatedwiththecon
struction and estimation of adult equivalence scales. The solution advanced in
2002 byLewbel, Chiappori and Browningisfurther analysed inthiscontribution.
It departs from the attempt to compare the standards of living of different house
holdsand proposes insteadequivalence scalesbased onthecomparison ofindiffe
rence curves attained by the same or comparable individuals in two different set
tings,e.g., livingalone versus livingwithaspouse.This approach requiresthere
covery of the individual consumption demand functions within a household from
thespecificationofacollective householdmodel.
Again, in a context of welfare measurement, the relation between welfare a
mong households and welfare among individuals is investigated, from a theoreti
cal point of view, by Eugenio Peluso and Alain Trannoy in the paper Welfare
Comparisons Among Individuals Under Samuelson's Model of Households.
Indeed, the traditional approach to consumer behaviour, inequality and welfare
measurement postulates that households behave as if they are single decision
making units. On the other hand, data bases report data on households according
tothe"unitarymodel" ofhouseholdbehaviour.This"implieseitherthatthewelfa
re of individuals withina household is unimportantor thattheintra-householddi-
Foreword IX
stributionisoptimalforthepolicy maker". Samuelsonhasproposed analternative
to this model known as the "collective approach" to household behaviour.Follo
wingSamuelson's model, the authors provide here their owncontribution bycha
racterising each type of individual by a given weight and utility function, with
households that maximize a "household social welfare function" of the weighted
utilitarian type.The authors showthat theinequalityrankingamonghouseholdsis
preserved at the individual level ifthe utilityfunction of the individuals isincrea
sing,concave andif itsatisfies theadditional assumptionsofPrattAbsoluteCoef
ficient and Absolute Prudence Measure which are reinterpreted in the context of
welfaremeasurement.
Awellbalanced compromise betweenthetheoretical foundationsofthe equi
valence scales andtheirempirical implicationsisestablished inthepaper Equiva
lence Scales: a Fresh Lookatan Old Problem.Theoryand EmpiricalEviden
ce, by Gustavo De Santis and Mauro Maltagliati: Indeed, it further analyses a re
cently introduced "Decomposition Model of the Effects of Demographic Meta
morphosis", named DMZ, for the inclusion of demographic variables in complete
demand systems, developed before by the same authors. This model allows the
decomposition of the effects of anydemographic characteristics on consumer be
haviour and leads to the identification of two components, cost and style. The
modelistestedonItalianHBSmicro-data 1987-2000againstEngeland Ray's PS.
Equivalence scales are calculated and compared, both in multi-year data case
(varyingprices) andinsingleyearcase (fixedprices).Itisarguedbytheseauthors
that modelling style effects helps to better understand the consumption profiles,
and allows to obtain unbiased estimates of equivalence scales. It is claimed too
that "multi-year complete demand systems, theoretically elegant as they may be,
are verycumbersometoestimate,do notpermitresearcherstoexaminetheimpact
of demographic characteristics with sufficient detail and, if unconstrained, fre
quentlylead to inconsistentresults, and,ifconstrained,mayleadtobiasedestima
tes". Both incomplete demand systems like Engel model and complete ones, like
Ray's PS,arethoughttoosimpleandthereforeinadequatetorepresentreality._On
thecontrary, thiscontribution offers good evidence that the DMZ model maypro
vide a right compromise between the opposite requirements of completeness and
simplicity,besidesrequiringsimplerestimationprocedures.
Costofchildren,averyrelevantquestionrelated toequivalencescalesaswell
astothepreviousmodelisanalysedinthepaperAn "EndogenousDummyVari
able" Estimator of Women's Opportunity Costs of Children in Italy, by
AntoninoDi Pinoand Massimo Mucciardi. In it,theauthorsdeterminetheoppor
tunity cost of children for Italian women. Two different criteria to measure this
cost are adopted for workingand non-workingwomen.For theformer,theoppor
tunity cost is given by the difference between the expected income in absence of
children and the expected income with children. For non-working women, the
second term of the previous difference isgiven bytheestimation oftheirreserva
tion wage, whichthe authors take as a proxy of the valueof their non-marketac
tivity.In ordertoestimateboth workingincomeandreservation wage,atwo-stage
"endogenous dummy variable" model is specified by introducing, at the first
stage, the participation probability and workingintensityreduced-form estimates.
x Foreword
Using the Bank of Italy data set of Italian households, the authors estimate work
earningsand theprobability oflabourforceparticipation.Theresultsoftheanaly
sis show a high level of opportunity cost for non-working women.When the age
of the first birth is lower,the forgone earningsofself-employedwomenishigher.
Indirectcostsofchildrenincreasewitheducationandexperience.
Taxation problems and equivalence scales are dealt withintwoexcellent pa
pers that exhibit similarities and points of contacts leading in many respects to
usefulsynergies.
Let's first have a look at Equivalence Scales, Horizontal Equity and Hori
zontal Inequity by Peter J. Lambert, wherethe author broadly describes waysto
frame the command of "equal treatment of equals" of the classical horizontal e
quity in taxation using equivalence scales. He considers three approaches, all of
them based upon the use of an equivalence scale, whichmaybe constantor inco
me-dependent. In thefirst one,theequivalence scale isessentiallybase-dependent
but income-independent. The other two can be interpreted as variant upon it, as
theypostulate equal average taxrates andtaxes,respectively.Therefore,equivalen
ce scalesare centralin virtually all horizontal equity/horizontal inequity analysis. In
this paper, the author discusses a new horizontal equity criterion, recently pro
pounded by Ebert and Lambert, about equal tax treatment of equals, i.e., "equal
progression amongequals". It isshownthatitcanbeachievedalongwithequality
ofpost-tax livingstandards for theincome-dependentequivalence scale of Donal
dson and Pendakur.Onthe other hand, byfollowingthelinetakenby vande Yen
and Muellbauer, one can recover the equivalence scale actually implicit in tax
systems, and horizontal equity is secured and horizontal inequity analysis all but
ruledout.
The second paper on taxation-redistributive problems is Equivalence Scales
and Taxation: A Simulation Analysis by John Muellbauer and Justin van de
Yen. The two authors sharply discusses the fundamentalelusive question that un
derlies many studies of redistributive equity, i.e., whatconstitutes the appropriate
adjustment for non-income differences between families?They have attempted in
a previous paper to address this problem by considering the equivalence scales
thatare implicitintransferpolicy.Inthispaper,theyconsiderthegeneralityofthe
equivalence scalesframeworkforanalysingfiscalpolicyandusesimulateddatato
explore alternative methods of estimatingscales implicit intransfer policy. Given
a suitably flexible equivalence scale, the framework is shown to be sufficiently
flexible to describe transfer systemsof the type seen in practice. Particular atten
tionispaid toatransfersystembasedonmultipletaxcreditsandexemptions,asit
prevails in practice and as it gave contradictory findings in previous studies fo
cused on base independent scales. Furthermore, there is empirical evidence that
the equivalence scale implicit in transfer policy may be strongly income depend
ent. Controlled simulations lend support to the estimation procedure suggested in
the paper. Also, the analysis presented suggests that there is a degree of interde
pendency betweentheequivalence scale andequivalenttaxfunctions,andthatthe
equivalence scaleestimatesare likelytobesensitivetotheselectedreference unit.
Consequently, the authors suggest to select as the reference unit the most preva
lent one in the data set used. Then, three alternative estimation methods can be
