URBAN-RURAL COST-OF-LIVING DIFFERENTIALS IN A DEVELOPING-ECONOMY

Casual observations suggest that the cost-of-living is substantially greater in urban than rural areas of developing economies, with implications for sectoral welfare comparisons. An AIDS demand model for housing and foodgrains is estimated on a household level data set for Java, after adjusting housing rents for heterogeneity in quality. The retrieved cost function indicates that the cost-of-utility at the urban price vector exceeds its rural value, although the differential has been substantially overestimated in the past. The relative cost of urban living is found to increase as reference rural income increases. © 1991.