Declining Equivalence Scales and Cost of Children: Evidence and Implications for Inequality Measurement

This article estimates expenditure-dependent equivalence scales for Italian couples with and without children. Following Donaldson and Pendakur (2006), the generalised absolute equivalence-scale exactness (GAESE) restrictions are incorporated into a translated quadratic almost ideal demand system. We obtain declining-with-expenditure equivalence scales, a pattern that tends to strengthen when the number of children increases. Thus, scale economies in current consumption are lower for families with poor expenditure capacities. We also show that families living in the South bear a substantial additional cost to achieve the same well-being of those living in the North. Finally, we find that ignoring the declining with expenditure pattern may involve a relevant understatement of measured inequality.