The marginal utility of income and homogeneous demand systems

It is important for policymakers and researchers to know how the marginal utility of a population changes with income. This effect is measured by the elasticity of marginal utility of income and is a key parameter in, for examples, cost–benefit analysis, optimal taxation, and measurement of inequality. This paper proposes and applies a demand systems approach to estimate the elasticity of marginal utility of income. Using the PSID survey data for representative samples of households in the United States, I estimate the elasticity of marginal utility of income over households to approximately 0.58.