Sponsored Projects for Undergraduate Research

The standard approach to measuring poverty in low income countries relies on measuring households’ total expenditures on non-durable
consumption and services and prices for these goods, an approach implemented
at the World Bank through the design and implementation
of comprehensive “expenditure modules” in the Living Standards Measurement
Surveys (LSMS). Though the Marshallian theory of demand provides sound theoretical
foundations for the standard approach, the task of measuring all
expenditures is both expensive and challenging, particularly since it
seems clear that some important kinds of expenditures are quite difficult
to measure (e.g., expenditures on housing services for populations
with varying tenurial arrangements).
Satisfying the data requirements for measuring welfare and poverty
would be much less expensive if one needed to measure only a selected
subset of goods and services. But the same Marshallian theory that
justifies using prices and total expenditures to measure welfare also
tells us that using a subset of expenditures is invalid save under highly
implausible assumptions regarding households’ utility functions.
However, the Marshallian formulation of the theory of demand is
not the only possible formulation. In particular, instead of relying on
prices and total expenditures, the Frischian theory relies on prices and
the marginal utility of expenditures, and Ligon (2017) shows how this
latter quantity can be recovered as a latent variable from an incomplete
demand system. This incomplete demand system needs to have data
on only a small small selection of consumption goods and services.
Taking the logarithm of this latent variable and adjusting for some
household characteristics gives a measure of consumer welfare Ligon calls “neediness.” Thus, the Frischian theory and our approach to estimation
offers a theoretically sound and empirically practical basis for
measuring household welfare using data on prices and expenditures on
only a small number of goods.
In principal the resulting welfare measures should be comparable
across time, countries, and even differently designed expenditure modules.
Since we don’t rely on total expenditures for the welfare calculation
there’s no need to calculate things like ‘real’ expenditures or to
use PPP indices.
The long-term vision for this research is a set of methods which allows
one to estimate household welfare in a way which is internationally
and intertemporally comparable, using only quite modest data on a selected
handful of household expenditures on different items. The theory
which justifies this is mostly in place, but of course theory will fail to
anticipate issues that arise in application. Below are two separate proposals,
each of which is designed around particular applications using
LSMS data from Africa to extend the methods which seem sound in
theory to real-world application. The standard approach to measuring
poverty in low income countries relies on measuring households’ total
expenditures on non-durable consumption and services and prices for
these goods, an approach implemented at the World Bank through the
design and implementation of comprehensive “expenditure modules”
in the Living Standards Measurement Surveys (LSMS).
Though the Marshallian theory of demand provides sound theoretical
foundations for the standard approach, the task of measuring all
expenditures is both expensive and challenging, particularly since it
seems clear that some important kinds of expenditures are quite difficult
to measure (e.g., expenditures on housing services for populations
with varying tenurial arrangements).
Satisfying the data requirements for measuring welfare and poverty
would be much less expensive if one needed to measure only a selected
subset of goods and services. But the same Marshallian theory that
justifies using prices and total expenditures to measure welfare also
tells us that using a subset of expenditures is invalid save under highly
implausible assumptions regarding households’ utility functions.
However, the Marshallian formulation of the theory of demand is
not the only possible formulation. In particular, instead of relying
on prices and total expenditures, the Frischian theory relies on prices
and the marginal utility of expenditures, and ligon15 shows how this
latter quantity can be recovered as a latent variable from an incomplete
demand system. This incomplete demand system needs to have data
on only a small small selection of consumption goods and services.
Taking the logarithm of this latent variable and adjusting for some
household characteristics gives a measure of consumer welfare Ligon
calls “neediness.” Thus, the Frischian theory and Ligon’s approach to
estimation offers a theoretically sound and empirically practical basis
for measuring household welfare using data on prices and expenditures
on only a small number of goods.
In principal the resulting welfare measures should be comparable
across time, countries, and even differently designed expenditure modules.
Since we don’t rely on total expenditures for the welfare calculation
there’s no need to calculate things like ‘real’ expenditures or to
use PPP indices.
The long-term vision for this research is a set of methods which allows
one to estimate household welfare in a way which is internationally
and intertemporally comparable, using only quite modest data on a
selected handful of household expenditures on different items. The
theory which justifies this is mostly in place, but of course theory will
fail to anticipate issues that arise in application. Our current research
plan involves implementing these methods using a number of household
suveys in Africa to extend the methods which seem sound in theory to
real-world application.