Reference Income Effects in the Determination of Equivalence Scales Using Income Satisfaction Data

38 Pages Posted: 18 Nov 2016

See all articles by Melanie Borah

Melanie Borah

Otto-von-Guericke-Universität Magdeburg

Andreas Knabe

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute)

Carina Kuhställer

Otto-von-Guericke-Universität Magdeburg

Date Written: October 17, 2016

Abstract

We estimate household equivalence scales using income satisfaction data from the German Socio-Economic Panel. We extend previous studies applying this approach by taking reference income into account. This allows separating needs-based from reference effects in the determination of income satisfaction. We show that this adjustment helps to overcome a bias causing an overestimation of adults’ and an underestimation of children’s needs-based equivalence weights. Our results indicate that controlling for income comparisons eliminates the gap between equivalence scale parameters for adults and children found in other studies.

Keywords: equivalence scale, income satisfaction, relative income

JEL Classification: I320, J130, D310

Suggested Citation

Borah, Melanie and Knabe, Andreas and Knabe, Andreas and Kuhställer, Carina, Reference Income Effects in the Determination of Equivalence Scales Using Income Satisfaction Data (October 17, 2016). CESifo Working Paper Series No. 6123, Available at SSRN: https://ssrn.com/abstract=2871170 or http://dx.doi.org/10.2139/ssrn.2871170

Melanie Borah

Otto-von-Guericke-Universität Magdeburg ( email )

Faculty of Economics & Management
P.O. Box 4120
Magdeburg, 39016
Germany

Andreas Knabe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

Carina Kuhställer

Otto-von-Guericke-Universität Magdeburg ( email )

Faculty of Economics & Management
P.O. Box 4120
Magdeburg, 39016
Germany

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