The implications of income dependent equivalence scales for measuring poverty in Sri Lanka

Abstract

Purpose The purpose of this paper is to test whether household preferences satisfy the assumption of base-independence, to examine the effects of household income on equivalence scales and thereby food consumption economies of scale and to examine how far conventional poverty rates require adjustment when scale economies in food consumption are taken into consideration. Design/methodology/approach To achieve these aims, the authors use a Pendakur (1999) adaptation of the test of base-independence, and income dependent Engel (1895) equivalence scales. Findings In Sri Lanka, the hypothesis of base-independence is rejected: the equivalence scales increase with household income both at the national and the sectoral level, that is urban, rural and estate sectors. This suggests that low-income households enjoy greater scale economies. After adjusting for scale economies, urban, rural and estate poverty headcount ratios decline by 3.2, 8.8 and 13.7, respectively, while at the national level the decline is about 8.3. Research limitations/implications The results are based on the assumption that all of the adults in the households have identical tastes, irrespective of their gender and age. Furthermore, the survey data exclude three districts in the northern province of Sri Lanka due to resettlement activities took place after the civil war. Practical implications Higher scale economies among the poor imply that poverty among low-income households is overstated when using traditional measures of poverty rates. Originality/value The novelty of this paper is that it provides insights on the effect of income on food consumption economies of scale and implications of this phenomenon on poverty estimates in the context of a developing country like Sri Lanka.

Estimation of Equivalence Scale and Assessment of Its Impact on Poverty Measurement in Bangladesh

“…To the contrary, the expenditure on health care exhibits increasing economies of scale in income, and the expenditure on shelter shows very low equivalence scales in the poorest income group, and then non-monotone from second to fourth quartile. This result is notable in comparison with that of Jayasinghe et al [31]. Applying Engel's approach and using Sri Lanka data, they show that the equivalence scales are not base-independent.…”

Examining energy poverty in Chinese households: An Engel curve approach

“…The Engel curve approach to analysing energy expenditure (shares) and energy poverty has direct theoretical underpinnings for that matter. The decision to expend on energy goods and/or services involves the household's balancing of competing expenditures, (equivalised) income, economies of scale, household size and demographics, intra‐household power dynamics, level of education/skills, financial inclusion and/or literacy, inter alia (Dudel, Garbuszus, & Schmied, 2021; Hasan & Mozumder, 2017; M. S. Jayasinghe, Smith, Chai, & Ratnasiri, 2016). We aim to exploit this to analyse households' allocation shares and/or ability to modern energy products such as electricity, appliance ownership, home heating, clean cooking facilities, and so forth.…”

“…In particular, the logs of equivalised income and its square are directly implemented as instruments for equivalised expenditures in Equation (1), because the latter are known to suffer from endogeneity in estimated Engel Curves (Summers, 1959). We follow the extant Engel Curve literature-such as Banks, Blundell, and Lewbel (1997), Jayasinghe et al (2016), and so forth.-in this regard.…”

Domestic technology, consumption economies of scale and poverty: evidence from Sri Lanka

“…The use of equivalent incomes also allows adjustments to be made for such consumption scale economies (Deaton and Muellbauer 1980). A detailed discussion on the estimation procedure of equivalence scales under Engel method can be found in Jayasinghe et al (2016).…”