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Informational Content of Equivalence Scales Based on Minimum Needs Income

29 Pages Posted: 1 Feb 2017  

Andrew Grodner

East Carolina University - Department of Economics

Rafael Salas

Universidad Complutense de Madrid (UCM) - Department of Fundamentals of Economic Analysis I (Economic Analysis)

Date Written: February 1, 2017

Abstract

Uniform equivalence scales are routinely used for welfare comparisons and require that utility function is IB/ESE (independent of base/equivalent scale exact). This condition itself requires restrictions on the level of measurability and interpersonal comparability of preferences across households, so called informational basis, in that welfare ordering must be Ordinal and Fully Comparable (OFC). We show that if one calculates equivalence scale at particular utility level, for example households living in poverty, the informational basis is much weaker and requires full comparability only at a single point. For this purpose we introduce the axiom of Ordinal Local Comparability (OLC) and show that equivalence scale based on Minimum Needs Income is consistent with that axiom. We argue that subjective equivalence scale using the intersection method offers practical application of equivalence scale consistent with OLC.

Keywords: Informational Basis, Poverty, Equivalence Scales, Subjective Poverty Line, Local-comparability, Intersection Method

JEL Classification: D30, D63

Suggested Citation

Grodner, Andrew and Salas, Rafael, Informational Content of Equivalence Scales Based on Minimum Needs Income (February 1, 2017). Available at SSRN: https://ssrn.com/abstract=2909657

Andrew Grodner (Contact Author)

East Carolina University - Department of Economics ( email )

A423 Brewster Building
Greenville, NC 27858
United States
2523286742 (Phone)

Rafael Salas

Universidad Complutense de Madrid (UCM) - Department of Fundamentals of Economic Analysis I (Economic Analysis) ( email )

Campus de Somosaguas
Madrid
Spain

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