Equivalence Scales: A Fresh Look at an Old Problem. Theory and Empirical Evidence

Abstract

We discuss the theoretical properties (and the empirical results obtained for Italy in the years 1987-2000) of a recently-introduced method for the inclusion of demographic variables in complete demand systems. The main merit of the proposed procedure - labeled DM2, or Decomposition Model of the effects of Demographic Metamorphosis - is that it permits researchers to decompose in two main components ("cost" and "style") the effects on consumer behavior of any demographic characteristic, in a theoretically-consistent framework, with simple algebra, standard statistical software running on ordinary PCs, and only one cross section of data (i.e. with no variation in prices) - although applications to several years, with price variability, are possible, too.