THE INFORMATION-CONTENT OF EQUIVALENCE SCALES

It is well known that equivalence scales, defined as ratios of cost functions between demographically different households, cannot be completely identified from demand data alone. This paper derives the exact components of equivalence scales that are identifiable. It is shown that demand equations alone provide no information about equivalence scales in any one price regime, but that if equivalence scales in any one price regime were known, then demand data can identify the unique true equivalence scales in all other price regimes. Sensible identifying assumptions and implications for the appropriate construction and interpretation of equivalence scales are discussed, and some empirical tests and estimates from UK micro-data are provided.