Index-Number Tests and the Common-Scaling Social Cost-of-Living Index1

For a change in prices, the common-scaling social cost-of-living index is the equal scaling of every individual’s expenditure level needed to restore the level of social welfare to its pre-change value. This index does not, in general, satisfy two standard index-number tests. The reversal test requires the index value for the reverse change to be the reciprocal of the original index. And the circular test requires the product of index values for successive price changes to be equal to the index value for the whole change. We show that both tests are satisfied if and only if the Bergson-Samuelson indirect social-welfare function is homothetic in prices, a condition which does not require individual preferences to be homothetic. If indi-vidual preferences are homothetic, however, stronger conditions on the Bergson-Samuelson indirect must be satisfied. Given these results, we ask whether the restrictions are empiri-cally reasonable and find, in the case that individual preferences are not homothetic, that the restrictions make little difference to estimates of the index. 1 Thanks to Charlie Blackorby and Walter Bossert for comments and assistance with proofs, and to the Social Sciences and Humanities Research Council for research support