Matching as Non-Parametric Preprocessing for the Estimation of Equivalence Scales

Abstract: Empirically analyzing household behavior usually relies on informal data preprocessing. That is, before an econometric model is estimated, observations are selected in such a way that the resulting subset of data is sufficiently homogeneous to be of interest for the specific research question pursued. In the context of estimating equivalence scales for household income, we use matching techniques and balance checking at this initial stage. This can be interpreted as a non-parametric approach to preprocessing data and as a way to formalize informal procedures. To illustrate this, we use German micro-data on household expenditure to estimate equivalence scales as a specific example. Our results show that matching leads to results which are more stable with respect to model specification and that this type of formal preprocessing is especially useful if one is mainly interested in results for specific subgroups, such as low-income households.