Financial Stress Thresholds and Household Equivalence Scales

32 Pages Posted: 14 Mar 2015

See all articles by Guay C. Lim

Guay C. Lim

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Sarantis Tsiaplias

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Date Written: January 1, 2015

Abstract

This paper relates indicators of household financial stress to household income and expenditure with the objective of identifying household stress thresholds and comparable equivalence scales. A model is proposed whereby households try to absorb income shocks or shifts by shrinking consumption or engaging in consumption substitution, and is applied to data from the Household, Income and Labour Dynamics in Australia Survey. Households have different capacities to absorb a shock or shift, with those unable to absorb a shock or shift being financially stressed. The distribution of household financial stress thresholds is estimated, and is found to be dependent on heterogeneity in both welfare sensitivity and discretionary consumption stickiness. We also examine the equivalence scales implied by the model and derive the distortion associated with the assumption of homogeneity. We find that this assumption has a distortionary impact and results in significant over- or underestimation of equivalence scales depending on household type and size.

Keywords: Household financial stress, heterogeneity, equivalence scales, household welfare, minimum expenditure

JEL Classification: D10, I31, I32, D30

Suggested Citation

Lim, Guay C. and Tsiaplias, Sarantis, Financial Stress Thresholds and Household Equivalence Scales (January 1, 2015). Melbourne Institute Working Paper No. 5/15, Available at SSRN: https://ssrn.com/abstract=2577654 or http://dx.doi.org/10.2139/ssrn.2577654

Guay C. Lim

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
161 Barry Street
Carlton, VIC 3053
Australia

Sarantis Tsiaplias (Contact Author)

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

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