Estimating Equivalence Scales from Satisfaction Data with Endogenous Household Size and Income

Abstract

Analyses of income inequality across households crucially depend on equivalence scales. They define income increments necessary to keep a household’s living standard constant as it is joined by additional adults or children. Such scales have frequently been estimated using income satisfaction data, yet under the assumption that household income, size and structure are exogenous. The present paper is the first to relax this assumption and consider the possible endogeneity of income and family size in income satisfaction. This involves an empirical analysis of SOEP data using fixed-effects regressions with heteroscedasticity-based instruments. Our results confirm that endogeneity is relevant in the regression; equivalence weights, however, appear to be not generally biased from endogeneity.