The Identification of Fixed Costs

Some household expenditures, such as those for subsistence or basic needs, are fixed. Using the methodology of equivalence scales, we develop a model in which differences in fixed costs of characteristics across households can be identified from household behaviour. Equivalent expenditure for a household is the expenditure needed to bring a reference household, such as a single childless adult, to the level of well-being of household members. The equivalence scale for the household is the ratio of expenditure to equivalent expenditure. Only two types of equivalent-expenditure functions are used in practice: those in which the ratio of household expenditure and equivalent expenditure is independent of expenditure, and those in which their difference is independent of expenditure. We propose a class of equivalent-expenditure functions that allows for differences in fixed costs and generalizes both relationships. Using Canadian consumer-demand micro-data, we estimate equivalent-expenditure functions and equivalence scales. We find that, for large households, fixed costs of characteristics are large and positive, resulting in equivalence scales that decline with expenditure. Journal of Economic Literature Classification Numbers: D11, D12