Equivalence scales in a rank-3 demand system

Abstract

In the context of a rank-3 demand system equivalence scales measuring the cost of demographic characteristics independently of the base utility level can be identified from cross-section data without demographic separability restrictions. Although this can also be achieved with a rank-2 demand system that contains a nonlinear log expenditure term in its budget shares, tests performed in a nested framework suggest that the rank-3 demand system approach is empirically superior. The informative structure of the rank-3 demand system is used to estimate a detailed pattern of demographic costs including the cost of single parenthood and economies of scale within the family. © 1995.