Financial Stress Thresholds and Household Equivalence Scales

Guay Lim and Sarantis Tsiaplias

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: This paper relates indicators of household financial stress to household income and expenditure with the objective of identifying household stress thresholds and comparable equivalence scales. A model is proposed whereby households try to absorb income shocks or shifts by shrinking consumption or engaging in consumption substitution, and is applied to data from the Household, Income and Labour Dynamics in Australia Survey. Households have different capacities to absorb a shock or shift, with those unable to absorb a shock or shift being financially stressed. The distribution of household financial stress thresholds is estimated, and is found to be dependent on heterogeneity in both welfare sensitivity and discretionary consumption stickiness. We also examine the equivalence scales implied by the model and derive the distortion associated with the assumption of homogeneity. We find that this assumption has a distortionary impact and results in significant over- or underestimation of equivalence scales depending on household type and size.

Keywords: Household financial stress; heterogeneity; equivalence scales; household welfare; minimum expenditure (search for similar items in EconPapers)
JEL-codes: D10 D30 I31 I32 (search for similar items in EconPapers)
Pages: 29pp
Date: 2015-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://melbourneinstitute.unimelb.edu.au/downloads ... series/wp2015n05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2015n05

Access Statistics for this paper

More papers in Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Sheri Carnegie ().