The Identification of Fixed Costs From Consumer Behavior

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 behavior. 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 microdata, 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 expenditures.