Asset Bias in Household Needs Measurement
Rapp, Severin (2021) Asset Bias in Household Needs Measurement. INEQ Working Paper Series, 22. WU Vienna University of Economics and Business, Vienna.
Increasingly, the estimation of household equivalence scales relies on subjective data. This approach challenges not only traditional methodology, but also provides systematically lower estimates of household needs compared to other methods. I offer a novel take on this puzzle and argue that the failure to account for private wealth in subjective measurement is part of the explanation of why household financial needs appear to be low. Wealthy survey respondents claim to be satisfied with less income, as they can draw on their asset buffer to maintain a given living standard. Capitalising on SOEP survey data, I find that the financial needs of a household comprising five members relative to a reference household might be underestimated by up to 20% if wealth is not accounted for. Equivalence scales are central to poverty and inequality measurement, the design of social transfer systems and many other applications. Therefore, it is crucial to account for asset ownership when drawing on estimates that rely on the subjective methodology.