On estimating the cost of characteristics indices from consumer demand analysis

Abstract

We examine the information content of relative equivalence scales using a multiperiod framework and argue that in the absence of Independence of Base (IB) these scales can be uniquely identified from demand analysis only when the transformations of preferences through time are the same for all household types, a property termed as Intertemporally Invariant Base (IIB) utility. Restrictions imposed by IIB on conditional demands are tested empirically and found rejected within the context of a rank-3 demand system applied to individual household data drawn from the U.K. Family Expenditure Survey 1970-86. Welfare implications of false IIB assumptions are also empirically investigated. © Canadian Economics Association.