Are Traditional Equivalence Scales Still Useful? A Review and A Possible Answer

This paper presents a critical review of how literature on parametric equivalence scales has evolved. In particular, it focus on the issue of scale identification from consumption data and the underlying theory of household behavior. Indifference scales, defined on a supposedly more reliable approach to family consumption decision (Chiappori’s collective model), are replacing traditional equivalence scales in academic research. However, the latter remains the only available tool for tackling non-constant scale patterns with respect to expenditure, a condition empirically detected in several different countries. An implication is that studies based on traditional, but expenditure independent, equivalence scales, may lead to wrong outcomes, such as a substantial understatement of poverty measures. This is a strong reason for a realignment of operationally implemented scales towards the most recent empirical results. Finally, recent findings against the use of traditional equivalence scales are discussed and some reasons to view them as inconclusive are put forward.