Estimating conversion factors: A new empirical strategy and an application to Italy

Salardi, Paola (1); Scervini, Francesco (2); Chiappero, Enrica (3) (2016). 'Estimating conversion factors: A new empirical strategy and an application to Italy' Paper presented at the annual conference of the HDCA, Tokyo 2016.

A distinctive feature of the capability approach is the attention assigned to human diversity in determining the individual well-being. Personal or internal factors, such as age, gender, ability and disability, as well as external, socio-economic and “environmental” circumstances largely affect and determine the different abilities people have to transform available means (i.e. private and public goods and resources) into achievements. Each of these conversion factors will generally not have a separate, direct, mechanical relationship with a given achievement, independently from other factors. It will rather be the interaction and combination of this plurality of features that will determine the rate of conversion of individual resources into an achieved functioning.
Although there is a wide consensus in the capability literature on the assumption that internal and external factors matter in the well-being generation process, it is not fully clear how this conversion process works, how these factors interact with each other or how the conversion rates can be empirically measured or estimated.
This paper is aimed to address these issues, first suggesting a generalizable operational definition of “conversion rates” and then providing an empirical application for Italy regarding three functionings, namely being healthy, feeling safe and living in a clean environment. Central to the estimation of this conversion process is the role of public and private resources and their interrelations.
On conversion factors
As outlined, conversion factors are those “elements” that determine the ability of individuals to use their available resources to generate functionings. Following the notation in Kuklys (2005) and Binder and Broekel (2011), the functioning-generating function can be represented as:
b=f(c(x) z)
where b is a vector of functionings, x is a set of resources, c(.) and f(.) are conversion functions generating “characteristics” from resources and functionings from characteristics, respectively. The vector of conversion factors z enjoys the property to shape the process of conversion from resources, whose characteristics are the same for all individuals, to functionings, that are instead individual-specific. Stated differently, the same set of resources x can generate a different vector of functionings b only due to different conversion factors, z.
While the conversion factors are a theoretically clear concept, their estimation is much less straightforward. A first, preliminary issue consists in generating a sufficiently exhaustive list of conversion factors. Binder and Broekel (2011) follow Kuklys (2005) in identifying three sets of conversion factors, namely individual, social and environmental conversion factors. However, the distinction between resources and conversion factors might be less straightforward than it may seem at a first glance. For instance, education can be considered either a resource or a conversion factor, depending both on the nature of the functioning and on the definition of resources. On the one side, indeed, education can improve the conversion efficiency of private resources in generating the functioning “being healthy” (see Chiappero-Martinetti and Salardi, 2008); on the other side, education can be seen as a resource for the functioning “having a decent and respectable job”.
Once agreed on the distinction between the list of resources and the set of conversion factors, the second issue is the estimation of the role of conversion factors in mediating the conversion of commodities into functionings. The rather scant literature on this topic failed to reach a common strategy to estimate conversion factors. Over the last decade Kuklys (2005), Lelli (2005), Zaidi and Burchardt (2005), Chiappero-Martinetti and Salardi (2008), Binder and Broekel (2011, 2012), Hick (2016) suggested different solutions to the issue of estimating conversion factors. In this paper, we propose a new methodology, based on parametric regression techniques, that allows identifying how individuals with different characteristics (individual, social, environmental, and so on) are differently able to convert resources into functionings.
In the second part of the paper we apply the suggested empirical methodology to the case of Italy for three different functionings, related to health, personal security and environment. Merging microdata at individual level on income and achievements in these three well-being dimensions with public supply in the same domains, we propose to estimate: i) whether and how, on average, public and private resources are effective in raising the individual living condition; ii) whether and how conversion factors play a role in shaping the individual conversion functions; iii) which is the inter-relation between public and private resources in generating these functionings.
The policy implications of our results are of major relevance, since – in principle – they allow policy-makers to target public resources either to citizens who are the most effective in converting them to functioning or to citizens who are otherwise unable to get this functioning, or both.
Binder, M. and T. Broekel (2011), Applying a non-parametric efficiency analysis to measure conversion efficiency in Great Britain, Journal of Human Development and Capabilities, 12:2, pp.257-281
Binder, M. and T. Broekel (2012), The neglected dimension of well-being: Analyzing the development of “conversion efficiency” in Great Britain, The Journal of Socio-Economics, 41, pp.37-47
Chiappero-Martinetti, E. and P. Salardi (2008), Well-being process and conversion factors: an estimation, HDCP-IRC Working Paper Series, IUSS-Pavia, 3/2008
Hick, R. (2016), Between income and material deprivation in the UK: In search of conversion factors, Journal of Human Development and Capabilities, 17:1, pp.35-54
Kuklys, W. (2005), Amartya Sen’s Capability Approach: Theoretical Insights and Empirical Applications, Berlin: Springer.
Lelli, S. (2005), Using functionings to estimate equivalence scales, Review of Income and Wealth, 51:2, pp.255-284
Zaidi, A. and T. Burchardt (2005), Comparing incomes when needs differ: Equivalization for the extra costs of disability in the UK, Review of Income and Wealth, 51:1, pp.89-114

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