Equivalence Scales for the Former West Germany

Equivalence scales provide answers to questions like how much a household with four children needs to spend compared to a household with two children or how much a childless couple needs to spend compared to a single person household to attain the same welfare level. These are important questions for child allowances, social benefits and to assess the cost of children over the life-cycle for example. The latter is also interesting from a theoretical point of view, especially if future events are allowed to be uncertain. We discuss equivalence scales in an intertemporal setting with uncertainty. To estimate equivalence scales we use subjective data on satisfaction with life and satisfaction with income to represent the welfare level. Because satisfaction is measured on a discrete scale we use limited dependent variable models in estimation. The results are based on a panel from German households (GSOEP). Using satisfaction with life data we find that larger households do not need any additional income to be as satisfied with their life as a couple. Using satisfaction with income, however, indicates that an increase in the household size leads to a significant drop in the satisfaction with their income. This result is used to compute equivalence scales.