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This article estimates expenditure-dependent equivalence scales for Italian couples with and without children. Following Donaldson and Pendakur (2006), the generalised absolute equivalence-scale exactness (GAESE) restrictions are incorporated into a translated quadratic almost ideal demand system. We obtain declining-with-expenditure equivalence scales, a pattern that tends to strengthen when the number of children increases. Thus, scale economies in current consumption are lower for families with poor expenditure capacities. We also show that families living in the South bear a substantial additional cost to achieve the same well-being of those living in the North. Finally, we find that ignoring the declining with expenditure pattern may involve a relevant understatement of measured inequality.

This article deals with the estimation of parametric equivalence scales for Italian households with different demographic characteristics: composition, location and number of employed members in the household. Using a sample of 43,701 observations on monthly current expenditures from 1997 to 2004 we estimate a demand system for ten goods and we tackle the problem of corner solutions for some goods adopting the Two Step estimator proposed by Shonkweiler and Yen (Am J Agric Econ 81:972–982, 1999). The consumption behavior of households is also analyzed calculating compensated, uncompensated and expenditure elasticites for each commodity. By considering households that differ in composition (number of children), geographic location (four-different macro-areas of Italy), and number of employed adults, we allow for a range of useful comparisons.

This paper presents a critical review of how literature on parametric equivalence scales has evolved. In particular, it focus on the issue of scale identification from consumption data and the underlying theory of household behavior. Indifference scales, defined on a supposedly more reliable approach to family consumption decision (Chiappori’s collective model), are replacing traditional equivalence scales in academic research. However, the latter remains the only available tool for tackling non-constant scale patterns with respect to expenditure, a condition empirically detected in several different countries. An implication is that studies based on traditional, but expenditure independent, equivalence scales, may lead to wrong outcomes, such as a substantial understatement of poverty measures. This is a strong reason for a realignment of operationally implemented scales towards the most recent empirical results. Finally, recent findings against the use of traditional equivalence scales are discussed and some reasons to view them as inconclusive are put forward.

We use a sample of 43,700 observations on Italian households’ current expenditures to investigate consumption patterns from 1997 to 2004, a time period which encompasses the introduction of the Euro. Compensated and uncompensated price elasticities and expenditure elasticities for ten goods and heterogeneous households are obtained from the estimated parameters of a complete Censored non linear Almost Ideal Demand System (CAIDS) with demographic shifters. To tackle the problem of corner solutions for some goods we adopt the Two Step estimator proposed by Shonkweiler and Yen (1999). Parametric equivalence scales for the investigation period 1997-2004 are also computed for households with different demographic composition and different geographical location.

The online version of this article unfortunately contains some errors, which were corrected as follows. Under heading Equivalence scales, Equation 17: in the equation, both delta(i) and beta(i) should have a hat. After equation 17, the sentence starting with ‘‘Given the estimate of beta(i), Eq. 7...’’ should become ‘‘Given the estimate of beta(i), Eq. 17...’’. Under heading Equivalence scales, sixth paragraph. The sentence ‘‘Adding a child to an adult’s couple is more expensive than adding a second child, but...’’ should become ‘‘Adding a child to an adult’s couple is not more expensive than adding a second child and adding....’’ Under heading Concluding remarks, second paragraph. The sentence ‘‘As the reference household is a childless couple living in the centre, the scales imply significant household economies of scales going from one to two children, but adding a third child produces a higher marginal cost in all areas of Italy, a result in line with similar studies, so...’’ should be corrected as follows