CHAIR OF

PUBLIC ECONOMICS

The authors investigate the importance of reference effects in the estimation of equivalence scales from data on income satisfaction.

 The study shows that the separation of needs-based and reference effects helps to overcome a potential bias that causes an overestimation of adults' and an underestimation of children's needs. This result is confirmed by conducting an empirical analysis of data from the German Socio-Economic Panel, where controlling for income comparisons eliminates the gap between equivalence scale parameters for adults and children.

The working paper can be found here.