Sankhya: The Indian Journal of Statistics

1996, Volume 58, Series B, Pt. 2, pp. 288--301

EQUIVALENCE SCALES AND HETEROSCEDASTICITY

By

A. LIVADA, H. KANDILOROU and P. TZORTZOPOULOS, Athens University of Economic and Business

SUMMARY.  This paper presents and discusses equivalence scales for the cost of children corrected for heteroscedasticity. The scales are based on the simplest theoretical approach, the semi-logarithmic specification of Engel's model. Misspecification testing revealed the presence of significant heteroscedasticity. We corrected for heteroscedasticity establishing more efficient estimates for the calculation of equivalent scales. This is very important for the robustness of estimates since in finite samples efficiency is equally important to consistency. Comparison of corrected and uncorrected scales proves that it is unrealistic and rather dangerous to ignore the violation of the assumption of equal error variance.

AMS (1991) subject classification.  62H12, 60P20, 90A19.

Key words and phrases. Equivalence scales, heteroscedasticity, GLS method, efficiency.

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