Reference Income Effects in the Determination of Equivalence Scales Using Income Satisfaction Data

Abstract

We estimate household equivalence scales, i.e. the needs of additional adults and children relative to a single adult, using income satisfaction data from the German Socio-Economic Panel. We extend previous studies applying this approach by taking reference income into account. This allows separating needs-based from reference effects in the determination of income satisfaction. We show that this adjustment helps to overcome a bias causing an overestimation of adults’ and an underestimation of children’s needs-based equivalence weights. Our results indicate that controlling for income comparisons substantially increases children’s equivalence weight relative to that of adults.