Economies of Scale for Household Wealth: An Analysis of Equivalence Scales

Abstract

Measures of private wealth often refer to households or tax-units, but how does household wealth relate to individual welfare? Analogous to household economies of scale for consumption, this paper offers a methodology and empirical results to account for household wealth scale effects. These scale effects vary depending on the purpose of savings: funding consumption versus holding wealth for motives such as status (wealth-in-utility savings). Using the German Socio-Economic Panel's stated preference data, I estimate that economies of scale for wealth-in-utility savings are high. In addition, the paper offers an empirical application with regard to inequality measurement. As high wealth-in-utility economies of scale dominate among the wealthy, estimates of inequality tend to increase. Accounting for scale effects has moderate effects on the Gini index and top wealth shares in Germany, but reduces the wealth share of the bottom 50% of the distribution by up to half.