consumption inequality with and without various forms of transfers. Thirdly, we examine if inadequate representation of various wealth groups, particularly the poor and the rich households, explains the usually low inequality in the data. This requires the knowledge of the distribution of the non-responding or missing households. Once the missing observations are identified, the next step is how to account for them. We employ the Pareto distribution assumption for accounting for missing consumption per capita of households in the top and bottom wealth brackets (see Section 3). Finally, combination of the effects of transfers and missing households are tested. The results are reported in Section 4.

# **2.  Background**

# **The Azerbaijan Household Survey**

The history of household survey data collection based on international practice is relatively recent in Azerbaijan. The Azerbaijan HIES was first introduced in 2001 and it has been undertaken on a regular annual basis ever since. Several factors are cited as affecting the quality of the Azerbaijan HIES data. To begin with, the current sampling frame, which is based on the 1999 population census, has relatively large primary sampling units (PSU) with, on average, over 16,000 people. Such big primary units are unsuitable for periodic updating and have the potential of putting at risk the selection of a random sample. The survey instrument is deficient for measuring certain aspects of household consumption such as expenditures on durables and does not allow differentiating between emergency medical care expenditures from regular health medical expenditures.

Another peculiar aspect of Azerbaijan household practice is the interviewers’ hiring and work practice. The arrangement of interviewers may affect data collection practice and data quality. In Azerbaijan, one interviewer is permanently assigned to each selected PSUs. There is also a widespread understanding that some or most of the interviewers need further training to improve their ability to conduct the interviews. Moreover, there is unequal hiring practice for interviewers: out of a total 85 interviewers, 65 are regular staff of the SSC, while the rest are on contract basis and with less compensation. Such uneven pay and hiring practices could endanger the consistency and uniformity in the data collection process.

Finally, there is belief among those who are involved in the collection and use of the HIES data that the surveys do not adequately represent all income groups of the country. It has been widely acknowledged that rich households tend to decline participation in the surveys.

# **Empirical regularities in the HIES data**

The Azerbaijan HIES data satisfy most empirical regularities expected in a typical household survey data. The data have a lot of the characteristics typically found in a good household survey data. In terms of the composition of household consumption, expenditure on food as a share of total household income consistently declines from poorest deciles to the richest deciles. While the poorest tend to spend nearly over 90 percent of their total income on food consumption, the richest spend, on average, a little over 40 percent of their total income on food. The Engel’s Law, 3