Costs of Children and Living Standards in Australian Households

Melbourne Institute Working Paper No. 08/99

Date: March 1999


Maria Rebecca Valenzuela


Measuring the costs of children is of immense practical importance in a whole range of economic and social policy areas. In this paper, a new econometric procedure that improves on existing methods for obtaining estimates of such costs using the demand system approach is introduced. The study is based on the use of an extended linear expenditure system and develops an iterative maximum likelihood estimator that overcomes possible estimation problems that arise from the 2-step estimation procedures employed by the earlier authors. We also allow for a more general assumption about the equation "errors", that of non-zero correlation between the errors for different commodities in the same household. Another important contribution is the development of an estimation procedure for sets of seemingly unrelated regressions where the different sets of equations are linked by some common parameters. The proposed procedure is applied to the 1984, 1988-89 and 1993-94 Australian Household Expenditure Survey and results obtained update estimates of both the commodity-specific and general scales previously obtained for Australia

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