Applied Economics Letters

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How does household welfare vary in response

to changes in food prices? Poor vs. non-poor
households

Lucía Echeverría & Jose Alberto Molina

To cite this article: Lucía Echeverría & Jose Alberto Molina (2022): How does household welfare
vary in response to changes in food prices? Poor vs. non-poor households, Applied Economics
Letters, DOI: 10.1080/13504851.2022.2153788

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APPLIED ECONOMICS LETTERS
https://doi.org/10.1080/13504851.2022.2153788

ARTICLE

How does household welfare vary in response to changes in food prices? Poor vs.
non-poor households
a b
Lucía Echeverría and Jose Alberto Molina
a
CONICET and Department of Economics, University of Mar del Plata, Argentina; bDepartment of Economic Analysis, University of Zaragoza,
Spain, and Institute of Labor Economics, Zaragoza, Germany

ABSTRACT KEYWORDS
In this paper, we focus on poor households vs. non-poor households, using objective and Food consumption; Demand
subjective definitions of poverty. We evaluate the various responses of these households to system; Poverty; D12
changes in food expenditures, income, and prices, and simulate the welfare losses of food price JEL CLASSIFICATION
changes across poverty definitions. We use the QUAIDS model to estimate food elasticities and rely D12; I31; I32
on the National Survey of Expenditure and Household Income, from Uruguay 2016/2017, because
it contains novel information on the subjective poverty status of each household. Our results show
important differences across poverty definitions. In addition, we find that price increases may lead
to larger welfare losses in poor households. On average, the percentage of income needed to avoid
a loss in the economic welfare of poor households, defined by the objective method, is twice that
required by the non-poor households, for all price changes. Differences are much smaller when
using the subjective approach. Our main contribution is the first evidence of consumption
behaviour and welfare analysis under different poverty measures. Our findings highlight the
need for policies that mitigate the negative effects of price shocks.

I. Introduction and non-poor households to changes in food

expenditures and prices, using an objective (based
Elasticities are an important tool for policy and
on money-metric) and a subjective poverty (based
welfare analysis (de Brauw and Herskowitz 2021;
on self-assessment) definition. We rely on the
Roosen, Staudigel, and Rahbauer 2022). To better
Quadratic Almost Ideal Demand System demand
account for the welfare effects of economic and
system (QUAIDS hereafter). We simulate welfare
social policies, it is important to consider differ­
losses of food price changes across these groups.
ences that may exist across the income distribution
Our main contribution relies on providing the first
(e.g. Caro et al. 2017). In this sense, if demand
evidence of consumption behaviour and welfare
analysis is aimed at understanding the responses
losses analysis, under different methods to measure
of poor households, the question remains: how do
poverty exploiting novel information on subjective
we identify poor households? Combining objective
poverty.
and subjective measures may offer a more complete
understanding of well-being (Ravallion and
Lokshin 2001). For example, rent or mortgage pay­ II. Data and methodology
ments may impose a burden that translates into
Data
lower well-being (Tharp et al. 2020; Želinský,
Mysíková, and Garner 2021). Thus, subjective mea­ We use the 2016/2017 National Survey of
sures contain additional information that could be Expenditure and Household Income from
relevant for policymakers (Mahmood, Yu, and Uruguay (ENGIH). We define five groups of food
Klasen 2019; Wang et al. 2020). and beverages, following prior literature (Wood,
We focus on the intersection of food consump­ Nelson, and Nogueira 2012; Caro et al. 2017;
tion and poverty measurement, covering a existing Hussein, Law, and Fraser 2021): i) bread and
gap. We evaluate the different responses of poor dairy products (milk, yoghurt, cream, etc.); ii)

CONTACT Lucía Echeverría lecheverria@mdp.edu.ar CONICET and Department of Economics, University of Mar del Plata, Funes 3250, Mar del Plata,
Buenos Aires 7600, Argentina
© 2022 Informa UK Limited, trading as Taylor & Francis Group
2 L. ECHEVERRÍA AND J. A. MOLINA

grains, sugar, oil and flour-based products; iii) budget. Table A1 of Appendix A provides an
meat (all animal-based products); iv) fruit and insight to within-group heterogeneity.
vegetables; v) beverages (non-alcoholic and alco­
holic). Our sample amounts to 6,846 households.
Empirical strategy
Regarding poverty definitions, we use the official
method of computing poverty in Uruguay, which We estimate a QUAIDS (Banks, Blundell, and
compares total household income to a specific Lewbel 1997) defined as:
threshold given by the monetary value of a basic X � ��
m
basket, considering family size and economies of wi ¼ αi þ ti ðdÞ þ γ
j ji
ln p j þ βi ln
aðpÞ
scale (INE 2017). For the subjective measure, the � � � ��2
λi m
þ ln (1)
survey directly asks the respondent if ‘he/she con­ bðpÞ aðpÞ
siders that his/her family is poor’. 8.1% households
Where wi is the budget share of each category, p is
are objectively poor, while 36.7% households self-
the price vector, pj is the price of good j, and m is
classify themselves as being poor (see Table 1). Self-
total food expenditure, aðpÞ and bðpÞ are price
assessments of poverty status differ from conven­ P
aggregators defined as ln að pÞ ¼ α0 þ i αi ln pi þ
tional objective measure. This goes in line with PP Q β
1
recent evidence for other countries (Wang et al. j γji ln pi ln pj and bð pÞ ¼ i pi . We intro­
i
2 i
2020; for China and Mahmood, Yu, and Klasen duce household heterogeneity using a translating
2019 for Pakistan), suggesting that objective pov­ technology ti ðP dÞ (Perali 2003), so that
erty cannot fully capture economic well-being, ln m� ¼ lnm i ti ðdÞ ln pi . Appendix B provides
which calls for more attention to subjective further details of the QUAIDS, while Appendix
measures. C describes price computation and the endogeneity
Table 1 shows that food expenditure in shares is treatment. 1 2 Table 1 reports descriptive statistics.
similar across households, with the main compo­ Further, we
nent being meat, irrespective of their poverty sta­ compute the compensating variation of a price
tus, representing on average 32% of the food change using a second-order Taylor expansion of

Table 1. Descriptive statistics by poverty status.

Objective Poverty Subjective Poverty

Poor Non-Poor Poor Non-poor

Mean S.D. Mean S.D. Mean S.D. Mean S.D.

Food expenditure (in pesos) 5,108.3 34.04 7,806.5 62.73 5,954.9 71.83 8,543.2 71.83
Total income (in pesos) 20,649.1 12,381.5 65,864.6 55,241.3 39,707.3 24,631.7 75,356.5 62,310.9
Expenditure Shares
Bread, dairy 0.20 0.004 0.20 0.001 0.19 0.002 0.21 0.002
Grain, sugar, flour, oil 0.19 0.004 0.17 0.001 0.17 0.002 0.17 0.002
Meat 0.32 0.006 0.32 0.002 0.33 0.003 0.31 0.002
Fruit, vegetables 0.16 0.004 0.16 0.001 0.16 0.002 0.16 0.002
Beverages 0.13 0.004 0.15 0.001 0.15 0.002 0.15 0.002
Demographics
Montevideo 35% - 34% - 27% - 39% -
Urban >5,000 inhab. 42% - 42% - 44% - 41% -
Urban <5,000 inhab. and rural 23% - 23% - 28% - 20% -
1 if head is male 50% - 51% - 48% - 51% -
Age of the head (in years) 53.3 16.8 54.2 16.8 54.3 16.6 52.8 16.9
Household size 2.72 1.49 2.61 1.38 2.81 1.68 2.66 1.36
Number of children 0.51 0.88 0.44 0.80 0.57 0.98 0.47 0.82
Single households 10% - 23% - 24% - 21% -
% (poverty rate) 8.1 36.9
N 556 6,290 2,528 4,318
Montevideo is the capital and largest city in Uruguay. Peso is the Uruguayan currency.

1
Given the definition of our food categories, as in Wood, Nelson, and Nogueira (2012), we do not face the problem of zero expenditures. The percentage of zero
expenditure in each of the five food categories is sufficiently small.
2
In Table A2. of the Appendix A we report the estimates of the quadratic term (λi ) and the residuals of the first stage of the control function included in the
system (νi ) to show that the quadratic specification provides a good fit and that total food expenditure is indeed endogenous.
 APPLIED ECONOMICS LETTERS 3

the minimum expenditure function (e.g. Wood, products are not so for non-poor households. Panel
Nelson, and Nogueira 2012): (B) reports an estimate of income elasticity (Park
X et al. 1996). Poor households are more responsive
cv � w ðdlnpi Þ
i i to changes in income than non-poor households,
1 X X �
þ w i e�
ðdlnpi Þ dlnp j (2) for both poverty definitions. This means that objec­
ij
2 i j
tively and subjectively poor households adapt their
where e�ij are compensated price elasticities. demand to shocks in income proportionally more
than non-poor households.
Panel (A) of Table 3 shows the uncompensated
III. Results own-price elasticities.3 The most price-inelastic
Panel (A) of Table 2 reports food expenditure elas­ categories for objectively poor households are
ticities, and shows that all goods are normal. Bread bread and dairy and meat products. These cate­
and dairy products and meat are a necessity for gories are, in turn, revealed as the only necessary
objectively poor households, while fruit and vege­ goods with respect to food expenditure (see Panel
tables are also a necessity for non-poor households. (A) of Table 2), meaning that objectively poor
Bread and dairy, grain flour and sugar products, households probably have a diet more dependent
and fruit and vegetables are a necessity for subjec­ on bread, dairy, and meat products. In the case of
tively poor households, while grain flour and sugar subjectively poor households, the most price-

Table 2. Estimated expenditure and income elasticities by poverty status.

(A): Food Expenditure Elasticities (B): Income Elasticities

Objective Subjective Objective Subjective

Poor Non-poor Poor Non-poor Poor Non-poor Poor Non-poor

Bread, dairy 0.756*** 0.966*** 0.909*** 0.649 0.556*** 0.523*** 0.594*** 0.331***
(0.166) (0.050) (0.071) (0.900) (0.038) (0.010) (0.018) (0.008)
Grain, flour, 1.189*** 1.004*** 0.925*** 1.075*** 0.874*** 0.543*** 0.604*** 0.549***
sugar (0.017) (0.011) (0.009) (0.013) (0.059) (0.011) (0.019) (0.014)
Meat 0.952*** 0.977*** 1.083*** 1.152*** 0.700*** 0.529*** 0.708*** 0.588***
(0.037) (0.029) (0.018) (0.020) (0.047) (0.010) (0.022) (0.015)
Fruit, 1.116*** 0.968*** 0.940*** 0.947*** 0.821*** 0.524*** 0.614*** 0.483***
vegetables (0.053) (0.016) (0.036) (0.019) (0.056) (0.011) (0.019) (0.012)
Beverages 1.037*** 1.120*** 1.074*** 1.089*** 0.757*** 0.606*** 0.702*** 0.556***
(0.007) (0.029) (0.018) (0.015) (0.051) (0.012) (0.022) (0.014)
Panel (A) reports food expenditure elasticities obtained from system estimates. Panel (B) reports income elasticities obtained by multiplying the food
expenditure elasticity of each category of Panel (A) by an estimate of the food elasticity with respect to total income. All elasticities are computed at the mean
values of the variables. Bootstrapped standard errors in parenthesis. ***p < 0.01.

Table 3. Estimated own-price elasticities by poverty status.

(A): Uncompensated Elasticities (B): Compensated Elasticities

Objective Subjective Objective Subjective

Poor Non-poor Poor Non-poor Poor Non-poor Poor Non-poor

Bread, dairy −0.289 −0.670* −0.642 −0.522 −0.130 −0.477 −0.472 −0.379
(0.706) (0.300) (0.431) (1.477) (0.685) (0.270) (0.410) (1.475)
Grain, flour, −1.027*** −0.929*** −0.909*** −0.974*** −0.800*** −0.760*** −0.748*** −0.792***
sugar (0.046) (0.061) (0.076) (0.057) (0.127) (0.079) (0.080) (0.100)
Meat −0.655*** −0.858*** −0.820*** −0.939*** −0.353* −0.547** −0.467** −0.579***
(0.175) (0.147) (0.154) (0.115) (0.153) (0.171) (0.142) (0.165)
Fruit, −0.947*** −0.863*** −0.838*** −0.893*** −0.772*** −0.706*** −0.684*** −0.741***
vegetables (0.187) (0.126) (0.171) (0.113) (0.189) (0.064) (0.122) (0.079)
Beverages −1.021*** −1.022*** −1.043*** −0.927*** −0.882*** −0.852*** −0.880*** −0.764***
(0.050) (0.057) (0.085) (0.107) (0.134) (0.124) (0.135) (0.097)
Uncompensated and compensated own-price elasticities computed at the mean values of the variables. Bootstrapped standard errors in parenthesis. ***p <
0.01, **p < 0.05, *p < 0.1.

3
We focus on own-price elasticity because these elasticities are used to estimate welfare losses due to changes in price.
4 L. ECHEVERRÍA AND J. A. MOLINA

inelastic categories are also bread and dairy and
meat products, with the addition of fruit and vege­
tables. Given that the average food expenditure of
subjective poor households is higher than that of
objective poor households (see Table 1), it is
expected that their demand for fruit and vegetables
also reacts less to price changes. This is in line with
the fact that it is a necessary good for subjective
poor households, but not for objective poor house­
holds (see Panel (A) of Table 2).
Panel (B) of Table 3 shows compensated elasti­
cities. The smallest are for meat, indicating that all
households react significantly less to changes in the
price of meat than to any other price change. This
relates to the large budget share of meat products
across all households (see Table 1). In addition,
objectively and subjectively poor households have
an even more inelastic response to changes in meat
prices compared to non-poor households. This
suggests that poor households are more dependent
on meat consumption in order to feed and satiate
the members of the household, while non-poor
households may have more alternatives to comple­
ment their diets with non-meat products.
Because the uncompensated own-price elastici­
ties of bread and dairy products are not signifi­
cantly different from zero (with the exception of
objective non-poor households), then the
Marshallian demands are perfectly inelastic. This
is supported by the fact that compensated changes
in prices are also unlikely to change the demand for
bread and dairy goods (see Panel (B) of Table 3)
and that bread and dairy goods are a necessity,
whose income demand is the smallest among all
categories (see Table 2). This behaviour is probably
capturing that bread and dairy products are staple
goods, indicating that households do not signifi­
cantly change their demand after having covered
their basic needs. This result is similar to the one
found for a staple goods in Mexico (tortillas)
(Wood, Nelson, and Nogueira 2012).
Table 4 reports average welfare losses (as
a proportion of total income) of a 25% and
50% price increase. On average, the percentage
compensation needed to avoid a loss in eco­
nomic welfare of objectively poor households is
twice the compensation required by the non-
poor households. However, differences are
much smaller when using the subjective
approach. This could be mainly associated with
the income distribution; the difference in the
average total income between poor and non-
poor households according to the subjective
definition is much smaller than in the case of
objective poverty.
Larger welfare losses are associated with changes
in the price of meat, driven by the inelastic meat
demand. Further, the largest difference in welfare
losses between the poor and non-poor are given by
the meat category for both poverty definitions,

Table 4. Welfare losses as a proportion of total income by poverty status (%).

Objective Subjective

Poor Non-poor Poor Non-poor

25% increase
Bread, dairy B Bread, dairy 1.2*** 0.6*** 0.7*** 0.6***
(0.040) (0.006) (0.009) (0.007)
Grain, flour, sugar 1.1*** 0.5*** 0.6*** 0.4***
(0.043) (0.005) (0.103) (0.008)
Meat 1.9*** 0.9*** 1.1*** 0.8***
(0.076) (0.010) (0.019) (0.013)
Fruit, vegetables 0.9*** 0.5*** 0.6*** 0.4***
(0.034) (0.005) (0.009) (0.005)
50% increase
Bread, dairy 2.4*** 1.0*** 1.2*** 1.1***
(0.081) (0.013) (0.017) (0.014)
Grain, flour, sugar 1.9*** 0.8*** 1.1*** 0.8***
(0.070) (0.010) (0.018) (0.012)
Meat 3.6*** 1.6*** 2.2*** 1.5***
(0.140) (0.021) (0.035) (0.021)
Fruit, vegetables 1.6*** 0.8*** 1.0*** 0.7***
(0.065) (0.009) (0.015) (0.011)
Second-order approximation of welfare losses as a percentage of total income. Bootstrapped standard errors
in parenthesis ***p < 0.01.

meaning that poor households need significantly
more income to restore their well-being after
a price change of meat products.
IV. Discussion
Our results capture differences in household
demand behaviour across poverty status and defi­
nitions. For example, the reaction of poor house­
holds to changes in food expenditure and prices
differs according to the poverty definition, suggest­
ing that the food basket and diet of these house­
holds is composed differently. This implies
a different degree of dependence on certain food
categories, depending on the poverty definition.
This analysis may shed light on the importance of
considering subjective evaluations when focusing
on welfare analysis. If governments seek to imple­
ment policies to mitigate the negative welfare
effects of price increases or income reductions,
they should also take into consideration the food
categories that are more inelastic for households
with a lower perceived well-being, and not only to
the income-poor households.
In addition, we find that the largest welfare
losses are associated with meat price changes,
given that poor households have a more price
inelastic response. Further, for objective poor
households, meat products are a necessity. This
result has important policy implications for
countries that export a food category markedly
consumed domestically. If meat prices increase
(e.g. because of external demand), larger welfare
losses are expected to be found in poor house­
holds. This finding highlights the need for poli­
cies that mitigate the negative effects of price
shocks.
Acknowledgements
We are grateful to the participants of the 2021 meeting of the
Society of Economics of the Household (Boston, US) for help­
ful comments and suggestions.
Disclosure statement
No potential conflict of interest was reported by the
authors.
APPLIED ECONOMICS LETTERS 5
ORCID
Lucía Echeverría http://orcid.org/0000-0002-7188-1242
Jose Alberto Molina http://orcid.org/0000-0002-9437-4606
Availability of data and materials
ENGIH data set can be downloaded from the website of the
National Institute of Statistics (INE) of Uruguay, https://www.
ine.gub.uy/engih2016
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 APPLIED ECONOMICS LETTERS 7

Appendix A Supplementary Tables

Table A1. Within-food category heterogeneity.

Objective Poverty Subjective Poverty

Poor Non-Poor Poor Non-poor

Mean S.D. Mean S.D. Mean S.D. Mean S.D.

Bread and dairy products
bread 0.53 0.23 0.51 0.23 0.53 0.23 0.50 0.23
dairy 0.47 0.23 0.49 0.23 0.47 0.23 0.50 0.23
Grain, sugar and oil products
grain and flour-based 0.45 0.30 0.40 0.31 0.43 0.31 0.39 0.30
sugar 0.19 0.23 0.26 0.28 0.22 0.26 0.27 0.29
oil products 0.36 0.27 0.34 0.28 0.35 0.28 0.34 0.28
Meat
beef 0.47 0.34 0.47 0.34 0.50 0.35 0.45 0.33
chicken 0.15 0.24 0.13 0.22 0.14 0.24 0.13 0.21
fish 0.03 0.12 0.06 0.17 0.04 0.15 0.07 0.18
others 0.36 0.32 0.33 0.32 0.31 0.32 0.34 0.32
Fruits and vegetables
fruits 0.26 0.29 0.36 0.29 0.31 0.29 0.38 0.29
vegetables 0.74 0.29 0.64 0.29 0.69 0.29 0.62 0.29
Beverages
non-alcoholic 0.82 0.30 0.82 0.28 0.82 0.28 0.82 0.28
alcoholic 0.18 0.30 0.18 0.28 0.18 0.28 0.18 0.28

Table A2. Relevant sub-set of system parameters.

Objective Poverty Subjective Poverty

Poor Non-Poor Poor Non-poor

Coeff. s.e. Coeff. s.e. Coeff. s.e. Coeff. s.e.

quadratic income term
λ1 0.0181*** 0.0031 0.0088*** 0.0008 0.0118*** 0.0012 0.010*** 0.0008
λ2 0.0009 0.0025 −0.0018* 0.0010 0.0013 0.0015 −0.002** 0.0009
λ3 −0.0115*** 0.0039 −0.0082*** 0.0014 −0.0038* 0.0020 −0.003*** 0.0013
λ4 −0.0078*** 0.0026 −0.0022* 0.0011 −0.0059*** 0.0017 −0.002*** 0.0011
λ5 0.0002 0.0021 0.0035*** 0.0008 −0.0034** 0.0016 −0.002** 0.0011
residuals of
the control function
v1 −0.0331* 0.0174 −0.0330*** 0.0045 −0.0379*** 0.0069 0.0335*** 0.0076
v2 −0.0218 0.0205 0.0119** 0.0048 0.0170** 0.0086 0.0036 0.0075
v3 0.0913*** 0.0287 0.0651*** 0.0069 0.0546*** 0.0119 −0.0129 0.0109
v4 −0.0256 0.0197 −0.0174*** 0.0045 −0.0122 0.0080 −0.0107 0.0071
v5 −0.0106 0.0170 −0.0265*** 0.0046 −0.0215*** 0.0079 −0.0134* 0.0074
Bootstrapped standard errors. ***p < 0.01, **p < 0.05, *p < 0.1.

Appendix B Quadratic Almost Ideal Demand
System
The QUAIDS model proposed by Banks, Blundell, and Lewbel
(1997), is a generalization of the Almost Ideal Demand System
(AIDS) introduced by Deaton and Muellbauer (1980). This
extension incorporates a quadratic logarithm expenditure
term in the specification of the system, while preserving con­
sistency of aggregation across consumers of the AIDS lineal
model, and allows us to derive flexible price and income
responses within a theoretically coherent structure.
We have chosen QUAIDS, given its properties and advan­
tages over simpler models. QUAIDS is derived from utility
theory and exactly satisfies the axioms of choice and integr­
ability and allows for exact aggregation of consumers due to
underlying preferences that are of the generalized Gorman
polar form (Banks, Blundell, and Lewbel 1997). Further, the
system introduces a quadratic term for income, allowing flex­
ibility by relaxing the assumption of linearity of Engel curves.
Models that do not account for the Engel curvature may
generate distortions in the patterns of welfare losses associated
with price changes (Banks, Blundell, and Lewbel 1997). This
process captures more general income responses compared to
other models. Given its properties, the model produces
a plausible and theoretically based description of consumer
behaviour. It has been widely adopted in the empirical litera­
ture of household demand behaviour (Caro et al. 2017;
Hussein, Law, and Fraser 2021; de Brauw and Herskowitz
2021; Roosen, Staudigel, and Rahbauer 2022).
QUAIDS is based on the following indirect utility function:
8 L. ECHEVERRÍA AND J. A. MOLINA

"� � # 1
ln m ln aðpÞ 1 with δij ¼ 0 if i�j δij ¼ 1 if i ¼ j. In turn, compensated
ln V ðp; mÞ ¼ þ λðpÞ (B1) elasticities can be calculated as:
bðpÞ
e�ij ;eij þ ei wj (B8)
where p is the price vector of food categories, m is total food
expenditure, and aðpÞ is a transcendental logarithm function, Furthermore, observed heterogeneity can be introduced in the
defined as: demand system by incorporating household demographic
characteristics in a theoretically plausible way Perali (2003).
X 1X X
ln aðpÞ ¼ α0 þ αi ln pi þ γ ln pi ln pj : We specify demographic variables implementing a translating
i 2 i j ji
household technology ti ðdÞ, so that demographic characteris­
tics interact additively with income (i.e., as if they were fixed
In this function, pi is the price of good i for i ¼ 1; . . . ; k; and
costs deflating income), where d is a set of household char­
bðpÞ is a Cobb-Douglas price aggregator defined as bðpÞ ¼
Q β P acteristics. Then, the demographically modified food expen­
P
i pi and λðpÞ ¼ i λi ln pi .
i
diture is ln m� ¼ lnm ti ðdÞ ln pi , in which the asterisk
Compliance with the properties of the economic demand i
theory imposes linear constraints on the parameters of the indicates demographically modified variables. The demogra­
budget share equations. In particular, additivity (Equation. phically modified budget share equation is4
B2), homogeneity of degree zero in prices and income X � ��
m
(Equation. B3), and symmetry (Equation. B4) wi ¼ αi þ ti ðdÞ þ γ ln pj þ β ln
j ji i
aðpÞ
X X X X � � � ��2
α ¼ 1; γ ¼ 0; β ¼ 0; λ ¼0 (B2) λi m
i i i ji i i i i þ ln (B9)
bðpÞ aðpÞ

For the estimation, an error term 2i is added to the right-hand

X side of Eq. (B.9), which is assumed to have a multivariate
γ
j ij
¼0 (B3)
normal distribution with covariance matrix . One of the
budget share equations is dropped from the system estimation
γij ¼ γji (B4) because Σ is singular, in order to comply with the adding-up
condition. After estimation, the parameters of the dropped
Let qi denote the quantity of good i consumed by a household, equation are recovered, following the restrictions imposed.
then the expenditure share for good i is defined as The system is estimated by Maximum Likelihood, and elasti­
wi ¼ pi qi =m. Applying Roy’s identity to Equation. (B1), we cities described in Equations (B6), (B7) and (B8) are demo­
obtain the demand system equation in budget share form for graphically modified by the translating household technology.
each aggregated food category:

X � � � � ��2
m λi m
wi ¼ αi þ γ
j ji
ln pj þ β i ln þ ln Appendix C Adjusted Prices and Endogeneity
aðpÞ bðpÞ aðpÞ
(B5) In this Appendix, we first address the estimation of prices,
which are needed to fully model household consumption
where pj is the price of good j. The AIDS model is a particular behaviour and assess welfare changes, and we then describe
case of QUAIDS when λi ¼ 0. If the vector λ is statistically how we deal with the potential endogeneity of total
equal to zero, then the underlying Engel curves are linear. expenditure.
Following Banks, Blundell, and Lewbel (1997), expenditure
and price elasticities can be computed after system estimation.
Expenditure elasticity of good i is defined as:
C1. Adjusted Unit Values
μ
ei ; i þ 1 (B6) By exploiting the quantity information available in the
wi
n h io dataset, we compute unit values (implicit prices) as the
2λi
where μi ¼ @@w m
ln m ¼ βi þ bðpÞ ln aðpÞ
i ratio of expenditure to quantity, for each food category of
the system. However, unit values can be endogenous
and uncompensated elasticity as:B because of measurement error, aggregation problems, and
quality effects related to heterogeneity in preferences
μij (Deaton 1988). Because the same food commodity is gen­
eij ; δij (B7)
wi erally available at different price and quality levels, unit
values do not take into account possible changes of the
where
� � n h i o2 composite good. Then, price elasticities can be biased.
λi βj
μij ¼ @@w
ln pj ¼ γij
i
μi αj þ �k γjk ln pk bðpÞ ln am
ðpÞ Solutions to this endogeneity problem typically assume

4
To ensure that the modified cost function maintains the homogeneity property, an additional constraint is imposed (Perali 2003).
 APPLIED ECONOMICS LETTERS 9

Table C1. Adjusted unit values.

Objective Poverty Subjective Poverty

Poor Non-Poor Poor Non-poor

Mean S.D. Mean S.D. Mean S.D. Mean S.D.

Bread, dairy 0.37 0.12 0.56 0.21 0.38 0.16 0.61 0.23
Grain, sugar, flour 3.37 2.08 1.57 1.71 1.36 1.28 1.99 1.78
Meat 1.20 0.35 1.32 0.51 1.01 0.46 1.43 0.53
Fruit, vegetables 0.28 0.10 0.34 0.14 0.31 0.13 0.35 0.15
Beverages 12.4 5.30 2.65 3.05 12.1 14.4 3.42 2.82
N 556 6,290 2,528 4,318
Food prices in pesos.

that geographically clustered households face similar
prices. In this way, unit values within regions cancel qual­
ity, aggregation, and measurement errors. We compute
quality-adjusted implicit prices following Cox and
Wohlgenant (1986). In this approach, real deviations
from regional mean prices (RDMP) are assumed to reflect
the quality effects induced by household characteristics.
Then, price functions are specified as:
X sense, total expenditure could be endogenous if taste shocks
RDMPi ¼ pi αi ¼ θ b
j ij ij
þ ςi
where αi is the regional mean price and bij are household
characteristics that serve as proxies for household preferences
for unobserved quality. Changes in the deviations from regio­
nal mean prices are explained by the variation of quality
characteristics. Then, quality-adjusted implicit prices are cal­
culated as:
p�i ¼ αi þ ςi
where ςi is the residual from Equation. (C1).
For the estimation, we use characteristics of the
household head (age, gender, and educational level),
family size, an indicator for the presence of children,
and total income and its square (to capture increases in
quality with income level). To account for regions, we
use the lower level of disaggregation available in the
dataset (‘departamentos’). Table C1 reports the descrip­
tive statistics of estimated quality-adjusted prices for
each sub-group. For all sub-groups, fruit and vegetables
along with bread and dairy products exhibit the lowest
prices on average, while beverages are the relatively
most expensive aggregate commodity. In addition,
bread and dairy products, meat, and fruit and vegetables
have lower mean prices for the poor population, regard­
less of the poverty definition, while beverages are sub­
stantially more expensive.
C2. Endogeneity of Total Expenditure
Potential endogeneity of total expenditure must also be
addressed. Expenditure may be endogenous because budget
shares and total expenditure are mutually determined. In this
(C1) (residuals in the demand system equations) that determine total
expenditure are correlated with the unobserved taste shocks to
a particular budget share in the system, or if measurement (or
recall) errors in the budget shares are correlated with measure­
ment (or recall) errors in total expenditure.
We instrument total expenditure with the logarithm of total
income and its square, assuming a source of exogenous variation
explaining the cross-sectional variability of total expenditure, but
without being correlated with taste variables and measurement
(C2) errors.5
We use the control function approach originally proposed by
Blundell and Powell (2004), because the use of the first stage
prediction in place of the endogenous variable in non-linear
models is biased and inconsistent. The approach consists of
a two-stage procedure. In the first stage, we regress all covariates
of the system (prices and demographic variables) and the instru­
ment on total expenditure, to predict the residuals (denoted as
νi ). In the second stage, the residuals of the auxiliary regression
are included in the system specified in Equation. (B9).
The control function approach gives a straightforward test
for endogeneity by assessing the significance of the coefficients
associated with the predicted residuals (of the first stage) in the
system equations. If the coefficients are statistically different
from zero, then the unexplained variation of the endogenous
variable also affects the variations in demand, implying endo­
geneity of total food expenditure.

5
We also use an index for access to basic amenities as alternative instrument, as in Caro et al. (2017). Even though system parameters are robust, total income is
a stronger instrument in the context of our data.