Welfare Measurement and Measurement Error

The approximate effects of measurement error on a variety of measures of inequality and poverty are derived. They are shown to depend on the measurement error variance and functionals of the error–contaminated income distribution, but not on the form of the measurement error distribution, and to be accurate within a rich class of error–free income distributions and measurement error distributions. The functionals of the error–contaminated income distribution that approximate the measurement error induced distortions can be estimated. So it is possible to investigate the sensitivity of welfare measures to alternative amounts of measurement error and, when an estimate of the measurement error variance is available, to calculate corrected welfare measures. The methods are illustrated in an application using Indonesian household expenditure data.