Comparison of Alternative Models of Household Equivalence Scales: The Australian Evidence on Unit Record Data*

Abstract

The equivalence scale is an important parameter in view of its use in welfare comparisons. This paper investigates sensitivity of the scale to models, methods and commodities. The estimations range from single equation. OLS in case of Engel and Rothbarth models to maximum likelihood in case of demographic demand systems. The estimated scales from demand systems generally lie between the Engel and Rothbarth scales. The Equivalence Scale Exactness hypothesis, considered necessary for interpretation of the scale as child cost, suffers only a mild rejection. The Australian evidence suggests that rank two demand models, rejected by the data, may exaggerate child costs.