Using Panel Data on Income Satisfaction to Estimate Equivalence Scale Elasticity

In this paper, the equivalence scale elasticity will be estimated by using individual panel data on income satisfaction from the German Socio-Economic Panel Study (GSOEP). Satisfaction or happiness data have been more frequently used by economists in recent years to analyze individual well-being. The approach differs from other subjective approaches as respondents are requested to evaluate current income rather than income in hypothetical situations. The estimated scale elasticity is higher compared to those from other subjective approaches based on German data. In addition, panel data enable different scale use by the respondents to be controlled. It can be shown that elasticity decreases when unobserved fixed-effects are controlled for. Copyright 2003 by the International Association for Research in Income and Wealth.