There and back again – estimating equivalence scales with measurement error

Abstract

Using income satisfaction data from the German Socio-Economic Panel, we find large differences in the equivalence weight of a partner when it is being estimated by direct and reverse regressions. We argue that neither of the two models will produce consistent estimates when there is stochastic error in satisfaction and measurement error in incomes. We propose a correction of mismeasured incomes using a constructed alternative income measure. The corrected results are relatively close to those obtained from direct regression. We do not find evidence that previous studies, using the direct regression method, severely suffer from measurement error in incomes.