Economies of Scale in the Household: Evidence and Implications from the American Past

Household economies of scale arise when households with multiple members share public goods, making larger households better o¤ at lower per capita expenditures. Research into household scale economies has not considered how household economies of scale have changed over time. I use American household expenditure surveys, covering 1888 to 1935, to produce the …rst comparable historical estimates of household scale economies in consumption. I …nd that scale economies changed signi…cantly from 1888 to 1935 for all expenditure categories considered. Scale economies in clothing, entertainment, and housing declined from 1888 to 1935, consistent with market expansion and increasing substitutes for these expenditure categories over time. Households in the past had fewer scale economies in food than today, however, exactly the opposite of what theory would predict and deepening a puzzle noted by Deaton and Paxson (1998). I then consider the implications of changing scale economies for estimates of real income and CPI bias. Previous estimates of CPI bias based on Engel curves do not account for changing scale economies in the household, and failure to account for changing scale economies can lead to omitted variable bias. My estimates of the annual rate of CPI bias are reduced by at least 25% once changing scale economies are accounted for, which suggest that household economies of scale have a large, material e¤ect on estimates of real income. JEL Classi…cations: D1, E3, J1, N3 Comments welcome and appreciated. Mailing Address: Department of Economics, The Ohio State University, 410 Arps Hall, 1945 North High Street, Columbus, OH 43210. E-Mail: [email protected]. I thank Dora L. Costa, Matthew S. Lewis, Audrey L. Light, Muna S. Meky and seminar participants at The Ohio State University and Indiana University for helpful discussions. Yasin Akcelik and Yunhui Tan provided excellent research assistance. Please do not quote or cite without permission. The usual disclaimer applies.