Equivalent-Income Functions and Income-Dependent Equivalence Scales*

This paper presents and investigates two classes of equivalent-income functions that are generalizations of those that correspond to exact (independent-of-base) absolute and relative equivalence scales. They provide less restrictive household demands, especially for children's goods, and have associated absolute and relative equivalence scales that may depend on income. We show that, under certain conditions, equivalent-income functions and the associated income-dependent equivalence scales can be uniquely estimated from demand data. We estimate them using Canadian data and find that the resulting scales are both plausible and income dependent. In addition, the estimated scales are used to measure inequality and we find that they make a significant difference to the level and trend in measured inequality.