Reissue

Public Disclosure Authorized

Edition
with a New Preface

The Analysis
Public Disclosure Authorized

of Household
Surveys
Public Disclosure Authorized

A Microeconometric Approach
to Development Policy
blic Disclosure Authorized

Angus Deaton
Winner of the 2015
Nobel Prize in Economics
The Analysis of
Household
Surveys
The Analysis of
Household
Surveys
A Microeconometric Approach

to Development Policy

Reissue Edition with a New Preface

Angus Deaton
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 Contents

Preface xi

Introduction 1
Purpose and intended audience 1
Policy and data: methodological issues 2
Structure and outline 4

Chapter 1: The design and content of household surveys 7

1.1 Survey design 9
Survey frames and coverage 10
Strata and clusters 12
Unequal selection probabilities, weights, and
inflation factors 15
Sample design in theory and practice 17
Panel data 18
1.2 The content and quality of survey data 22
Individuals and households 23
Reporting periods 24
Measuring consumption 26
Measuring income 29
1.3 The Living Standards Surveys 32
A brief history 32
Design features of LSMS surveys 34
What have we learned? 35
1.4 Descriptive statistics from survey data 40
Finite populations and superpopulations 40
The sampling variance of the mean 43
Using weights and inflation factors 44
Sampling variation of probability-weighted estimators 49

References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”

v
vi  The Analysis of Household Surveys

Stratification 49
Two-stage sampling and clusters 51
A superpopulation approach to clustering 56
Illustrative calculations for Pakistan 57
The bootstrap 58
1.5 Guide to further reading 61

Chapter 2: Econometric issues for survey data 63

2.1 Survey design and regressions 66
Weighting in regressions 67
Recommendations for practice 71
2.2 The econometrics of clustered samples 73
The economics of clusters in developing countries 73
Estimating regressions from clustered samples 74
2.3 Heteroskedasticity and quantile regressions 78
Heteroskedasticity in regression analysis 79
Quantile regressions 80
Calculating quantile regressions 83
Heteroskedasticity and limited dependent
variable models 85
Robust estimation of censored regression models 89
Radical approaches to censored regressions 91
2.4 Structure and regression in nonexperimental data 92
Simultaneity, feedback, and unobserved heterogeneity 93
Example 1. Prices and quantities in local markets 93
Example 2. Farm size and farm productivity 95
Example 3. The evaluation of projects 97
Example 4. Simultaneity and lags: nutrition
and productivity 98
Measurement error 99
Selectivity issues 101
2.5 Panel data 105
Dealing with heterogeneity: difference- and
within-estimation 106
Panel data and measurement error 108
Lagged dependent variables and exogeneity in
panel data 110
2.6 Instrumental variables 111
Policy evaluation and natural experiments 112
Econometric issues for instrumental variables 115
2.7 Using a time-series of cross-sections 116
Cohort data: an example 117
Cohort data versus panel data 120
Panel data from successive cross sections 121
Decompositions by age, cohort, and year 123
 Contents  vii

2.8 Two issues in statistical inference 127

Parameter transformations: the delta method 128
Sample size and hypothesis tests 129
2.9 Guide to further reading 131

Chapter 3: Welfare, poverty, and distribution 133

3.1 Living standards, inequality, and poverty 134
Social welfare 134
Inequality and social welfare 136
Measures of inequality 138
Poverty and social welfare 140
The construction of poverty lines 141
Measures of poverty 144
The choice of the individual welfare measure 148
Example 1. Inequality and poverty over time
in Côte d’Ivoire 151
Example 2: Inequality and poverty by race in
South Africa 156
Exploring the welfare distribution: inequality 157
Lorenz curves and inequality in South Africa and
Côte d’Ivoire 160
Stochastic dominance 162
Exploring the welfare distribution: poverty 164
3.2 Nonparametric methods for estimating densities 169
Estimating univariate densities: histograms 170
Estimating univariate densities: kernel estimators 171
Estimating univariate densities: examples 175
Extensions and alternatives 176
Estimating bivariate densities: examples 180
3.3 Analyzing the distributional effects of policy 182
Rice prices and distribution in Thailand 182
The distributional effects of price changes: theory 183
Implementing the formulas: the production and
consumption of rice 187
Nonparametric regression analysis 191
Nonparametric regressions for rice in Thailand 194
Bias in kernel regression: locally weighted regression 197
The distributional effects of the social pension in
South Africa 200
3.4 Guide to further reading 202

Chapter 4: Nutrition, children, and intrahousehold allocation 204

4.1 The demand for food and nutrition 206
Welfare measures: economic or nutritional? 206
Nutrition and productivity 210
viii  The Analysis of Household Surveys

The expenditure elasticity of nutrition: background 211

Evidence from India and Pakistan 213
Regression functions and regression slopes
for Maharashtra 216
Allowing for household structure 219
The effect of measurement errors 221
4.2 Intra-household allocation and gender bias 223
Gender bias in intrahousehold allocation 224
A theoretical digression 225
Adults, children, and gender 229
Empirical evidence from India 231
Boys versus girls in rural Maharashtra: methodology 234
Standard errors for outlay equivalent ratios 235
Boys versus girls in rural Maharashtra: results 237
Côte d’lvoire, Thailand, Bangladesh, and Taiwan (China) 238
4.3 Equivalence scales: theory and practice 241
Equivalence scales, welfare, and poverty 243
The relevance of household expenditure data 244
Cost-of-living indices, consumers’ surplus, and
utility theory 245
Calculating the welfare effect of price 246
Equivalence scales, the cost of children, and utility theory 247
The underidentification of equivalence scales 248
Engel’s method 251
Rothbarth’s method 255
Other models of equivalence scales 260
Economies of scale within the household 262
Utility theory and the identification of economies of scale 268
4.4 Guide to further reading 269

Chapter 5: Looking at price and tax reform 271

5.1 The theory of price and tax reform for
developing countries 273
Tax reform 273
Generalizations using shadow prices 277
Evaluation of nonbehavioral terms 278
Alternative approaches to measuring
behavioral responses 279
5.2 The analysis of spatial price variation 283
Regional price data 283
Household price data 283
Unit values and the choice of quality 288
Measurement error in unit values 292
5.3 Modeling the choice of quality and quantity 293
A stripped-down model of demand and unit values 294
 Contents  ix

Modeling quality 296

Estimating the stripped-down model 299
An example from Côte d’lvoire 302
Functional form 303
Quality, quantity, and welfare: cross-price effects 306
Cross-price effects: estimation 311
Completing the system 314
5.4 Empirical results for India and Pakistan 315
Preparatory analysis 316
The first-stage estimates 316
Price responses: the second-stage estimates for Pakistan 317
Price estimates and taste variation, Maharashtra 320
5.5 Looking at price and tax reform 323
Shadow taxes and subsidies in Pakistan 324
Shadow taxes and subsidies in India 325
Adapting the price reform formulas 326
Equity and efficiency in price reform in Pakistan 328
Equity and efficiency in price-reform in India 330
5.6 Price reform: parametric and nonparametric analysis 332
5.7 Guide to further reading 334

Chapter 6: Saving and consumption smoothing 335

6.1 Life-cycle interpretations of saving 337
Age profiles of consumption 339
Consumption and saving by cohorts 342
Estimating a life-cycle model for Taiwan (China) 345
6.2 Short-term consumption smoothing and
permanent income 350
Saving and weather variability 351
Saving as a predictor of income change? 354
6.3 Models of saving for poor households 357
The basic model of intertemporal choice 357
Special cases: the permanent income and
life-cycle models 359
Further analysis of the basic model:
precautionary saving 361
Restrictions on borrowing 363
Borrowing restrictions and the empirical evidence 369
6.4 Social insurance and consumption 372
Consumption insurance in theory 375
Empirical evidence on consumption insurance 376
6.5 Saving, consumption, and inequality 383
Consumption, permanent income, and inequality 383
Inequality and age: empirical evidence 386
Aging and inequality 390
x  The Analysis of Household Surveys

6.6 Household saving and policy: a tentative review 393

Motives, consequences, and policy 394
Saving and growth 395
Determinants of saving 397
6.7 Guide to further reading 399

Code appendix 401

Bibliography 439

Subject index 463

Author index 474

 Preface

It is a pleasure to write a new preface to The Analysis of Household Surveys on its

twentieth birthday. It would be better still if this were a preface to a new edi-
tion, and I hope that one day I shall write it. In the meantime, I hope that this
Preface might be a guide to a new reader, by labeling those parts of the book
that seem still relevant, as well as those that would be leading candidates for
revision or updating.
The origins of the book go back to the early days of the Living Standards
Measurement Study (LSMS), which was set up in the World Bank around 1980.
As its name suggests, the original idea was to promote household surveys that
would enable the better measurement of poverty and of living standards
around the world, something that was difficult to do with the data then avail-
able. As time went on, and people came and went, the LSMS surveys evolved
into multi-purpose tools that would permit not only measurement, but also
analysis, permitting a better understanding of how people’s lives work, what
makes them tick, and why they are as well off or as poorly off as they are. Hence
“the analysis” of household surveys, not just the measurement of income, or
consumption, or wellbeing. In the original conception, there were to be a series
of volumes on different specific topics, with this volume being more general,
though with examples of topics that could be covered using the approach.
Today, it is hard even to remember how relatively uncommon the analysis of
individual household records was. Although there had been important very
early studies, including the 1955 book on family budgets by Sigbert Prais and
Hendrik Houthakker—which legend has it was the first economic analysis to
use an electronic computer—and although micro analysis figured in some of
the early textbooks, most economists were trained in econometric methods
that explicitly or implicitly focused on aggregate time series. So there was a lot
of important and survey-relevant material that remained uncovered. Students
who had completed their econometrics courses and turned to household sur-
vey data found much that puzzled them.
Perhaps the most obvious gap in standard economics training was then (as
it largely still is today) the topic of survey design, and how survey design should
(if at all) be incorporated into analysis. Survey data come with “weights,” related

xi
xii  The Analysis of Household Surveys

to survey design (for example, they might be the reciprocals of the probabilities
of selection), and many generations of economists have had to wonder for
themselves what should be done with them. Of course, this is standard material
for survey design statisticians, but those who design surveys do not work in the
same way economists do and sometimes have different ways of thinking and
different objectives. So, when I started writing the book, I wanted to try to
understand these issues better for myself, so I went back to the survey litera-
ture, and wrote up what I found. Chapter 1 is still one of the few treatments of
survey design from an economics perspective. One important change is that, at
around the time I was writing, STATA introduced a full suite of survey-design-
based econometric software, so it is no longer necessary for analysts to do what
I had to do, and write my own code.
Thinking about survey design forces the analyst to confront the difference
between sample and population, and to think seriously about the population
to which the analysis is supposed to apply. For survey samplers, the aim is often
the estimation of some characteristic of a finite population, such as the median
consumption of Indian families in 2015, something that could be known with
certainty from a census, a complete listing of the population. Is this the right
way of thinking about a regression analysis? Or should we consider some pos-
sible super population, of which the current population is but one possible
realization. These issues are important, and are rarely considered. As an exam-
ple, even today papers in economics and in health routinely publish standard
errors of means calculated from complete enumerations, such as mortality
rates.
In the same spirit, Chapter 2 was designed as a bridge from what is taught
in an econometrics course and what applied economists will find when they
confront microeconomic data. For several years, I used this chapter to teach a
course at Princeton that helped prepare applied students in labor and develop-
ment. When econometrics is taught by specialists, which has the huge advan-
tage of providing an overarching statistical framework, it is often useful to work
through some of the nitty-gritty issues of practice that are not conceptually
interesting, but can make the difference between convincing and unconvinc-
ing results. Sometimes this takes the form of warnings, that technical fixes
rarely fix anything by themselves, and that techniques, such as panel data
methods, which can work magic in ideal conditions, can be undermined by
imperfections of various kinds, particularly measurement error.
If I were rewriting Chapter 2 today, I would be even more skeptical. As I
taught the material over the years, it became clear that many of the uses of
instrumental variables and natural experiments that had seemed so compel-
ling at first lost a good deal of their luster with time. One problem is the reliance
of instrumental variables on exclusion restrictions. The orthogonality of instru-
ments to the error term requires that they be uncorrelated with omitted vari-
ables so that, when we are interested in the effect of x on y, and z is an
instrument, then z can only affect y through its effect on x, and not through any
other mechanism. This often seems plausible when an instrument is first
 Preface  xiii

proposed, but over time, other researchers, or other facts, can make the story
much less plausible. There is no general rule here, and some of the studies
using natural experiments and instruments have worn well, but that is more
the exception than the rule.
Twenty years later, I now find myself very much more skeptical about instru-
ments in almost any situation. I should also note a mea culpa: the late Tony
Atkinson, in his pre-publication review of the book, had noted that instrumen-
tal variables hardly ever worked. I should have paid more attention to his views.
Natural experiments are a form of instrumental variables. They often give a
clean answer, eliminating effects that otherwise would cloud the analysis. Yet
the “clean” answer is not always the answer that we want for policy or under-
standing. This is one aspect of the familiar trade-off between internal and
external validity; a natural experiment is like a laboratory experiment where
many factors are held constant, but where we have little idea whether the
effect will be replicated in settings that may be more relevant for policy.
Of  course, a good laboratory experiment tries to isolate some fundamental
mechanism that will always be present, even when modified, but such experi-
ments require more theory and background knowledge than is usually present
in natural experiments in economics. Occasionally such experiments look more
like anecdotes than analysis.
If I were writing the book today, there would be a new chapter on random-
ized controlled trials (RCTs).1 Two decades ago I, like most economists, thought
that if only we could do RCTs, life would be straightforward; we could dis-
cover the laws of behavior, understand poverty, and eliminate it. And indeed,
one of the major developments in applied microeconomics in the last 20 years
has been the widespread use of RCTs, particularly in economic development.
As always, the practice has brought useful experience with its complement
of successes and failures. RCTs often yield new insights and unexpected find-
ings. Yet they also have more problems than we anticipated, both in theory and
practice. They are not magic tools, any more than panel data or instrumental
variables were magic tools. Indeed, once upon a time, economists thought of
linear regression as a magic tool, and the history of econometrics teaching has
been one in which the great enthusiasm of the early days gave way to a sadder
catalog of regression diseases and diagnostics. The same is happening and will
continue to happen with RCTs although for sure, and like regressions, they are
likely to remain useful tools. But statistical inference with RCTs is much more
difficult than it at first appears, causality can rarely be firmly established,
the  influence of omitted variables is not magically erased by randomization,
and the lack of blinding—usually impossible in economics—can undermine
estimation in the same way that failure of exclusion restrictions undermines

1. For readers interested in what such a chapter would look like, a good account can be found in
my 2018 paper with Nancy Cartwright in Social Science and Medicine, Vol. 210, pp. 2–21:
“Understanding and Misunderstanding Randomized Controlled Trials,” https://doi.org/10.1016/j​
.socscimed.2017.12.005.
xiv  The Analysis of Household Surveys

instrumental variable estimation. And, as is widely understood, but often for-

gotten, the fact that some mechanism works in one place is no guarantee that
it works anywhere else. RCTs cannot, by themselves, support a program of
unconditional discovery of “what works.”
In the introduction to the book, I speculate about what can be done in the
absence of experiments. While I am now more skeptical about what can be
done with experiments, I continue to believe in what I wrote then. The trick is
to use the data to tell us something that we didn’t know before, and that can
help us change our minds, or see things differently. Sometimes this can be
done from simple descriptive statistics; that Indian per capita calorie consump-
tion was falling during a period of rapid economic growth was an important
finding in and of itself, and suggested a whole program of enquiry. That almost
half of all children in India were severely malnourished was a finding that then
Prime Minister Manmohan Singh described as “a national shame.” Such
straightforward descriptions can have huge effects on policy, as can correla-
tions and regressions.
Causal testing can also be supported in the same way through what philoso-
phers call the “hypothetico deductive method.” Given a hypothesis or an idea,
the key is to develop and work it to the point where its implications can be
transparently checked on the data. Sometimes, this will take an RCT, but if we
are clever and diligent enough, it can often be tested by looking at old data in
new ways, from a mean, a median, or a cross-tabulation. The analytical work
goes into the drawing out of implications from the hypothesis, not into deriv-
ing complex econometric methods or technical fixes.
Chapters 3 through 6 are more substantive, though all use econometric
methods to generate their findings. All of them could be updated with new
results, and in some cases (such as the model of quality choice in Chapter 5),
I  would modify or be more skeptical about the underlying assumptions. But
I  believe that these chapters—as well as the STATA code that comes at the
end—serve their original purpose of providing worked examples of the sort of
analysis that survey data are suited to.
The book has been widely used since 1997, it is frequently cited, and it has
been downloaded from the Bank’s website nearly 34,000 times. I am delighted
that it will now be back in print for those who would like to have a “real” copy
on their “real” desktops.

Angus Deaton
Princeton, December 2018

References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
on different data sets and different machines. The code listed here is available
on the following site:

http://www.worldbank.org/householdsurveys

References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
References in this publication to “Taiwan,” “Republic of China,” and “Taiwan (China)” refer to the
region, “Taiwan, China.” References to “Hong Kong” refer to the region, “Hong Kong SAR, China.”
Two decades after its original publication, The Analysis of Household
Surveys is reissued with a new preface by its author, Sir Angus Deaton,
recipient of the 2015 Nobel Prize in Economic Sciences. This classic work
remains relevant to anyone with a serious interest in using household
survey data to shed light on policy issues.

The book reviews the analysis of household survey data, including the
construction of household surveys, the econometric tools useful for such
analysis, and a range of problems in development policy for which this
survey analysis can be applied.

Chapter 1 describes the features of survey design that need to be

understood in order to undertake appropriate analysis. Chapter 2
discusses the general econometric and statistical issues that arise when
using survey data for estimation and inference. Chapter 3 covers the use
of survey data to measure welfare, poverty, and distribution. Chapter
4 focuses on the use of household budget data to explore patterns of
household demand. Chapter 5 discusses price reform, its effects on equity
and efficiency, and how to measure them. Chapter 6 addresses the role of
household consumption and saving in economic development. The book
includes an appendix providing code and programs using STATA, which
can serve as a template for users’ own analysis.

ISBN 978-1-4648-1331-3
90000

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