Inside the Household Dr Abigail Adams Spring 2016 Dr Abigail Adams - - PowerPoint PPT Presentation

Introduction Unitary

Inside the Household

Dr Abigail Adams Spring 2016

Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary

Inside the Household

Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary

Outline for Today

I Unitary model II Evidence on Unitary: Lundberg, Pollak and Wales III Evidence on Unitary: Duflo IV Cooperative models V Noncooperative models VI Evidence on Cooperative: Udry

Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary

Decision Making

◮ In general, agents will differ in their views on how

household income should be spent

◮ Three broad classes of decision making processes:

i Unitary ii Noncooperative iii Cooperative

Dr Abigail Adams The Economics of The Family - Week 2

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Unitary Model

“The family is a remarkable institution. And a complex

• ne. Indeed, so complex that much of economic

theory proceeds as if no such thing exists” Sen, A. (1984) Resources, Values and Developments

Dr Abigail Adams The Economics of The Family - Week 2

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Unitary Model

◮ Standard assumption = household can be modelled as if

an individual

◮ Implies that interactions between individuals in the

household are not relevant

◮ How might this be justified?

i Consensus model (Samuelson) - agree to maximise a consensus social welfare function ii Alturist model (Becker) - preferences of a benevolent parent become the preferences of the household; household maximand becomes the parent’s utility function

Dr Abigail Adams The Economics of The Family - Week 2

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Rotten Kid Theorem (Becker, 1974 & 1981)

Dr Abigail Adams The Economics of The Family - Week 2

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Rotten Kid Theorem (Becker, 1974 & 1981)

◮ Family consists of a group of purely selfish but rational

“kids" and one altruistic parent whose utility function reflects a concern for the wellbeing of the other family members

◮ Altruistic parent desires to make gifts/transfers to the kids ◮ Under his assumptions, sufficient to induce the kids to act

in an unselfish way — altruistic parent adjusts transfers so that each “rotten kid" finds it in their interest to choose actions to maximise family income

◮ Resulting income levels and distribution maximises

altruist’s utility function subject to the family resource constraint

Dr Abigail Adams The Economics of The Family - Week 2

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Rotten Kid Theorem (Becker, 1974 & 1981)

◮ Note: Depends implicitly on the (strong!) assumption of

‘transferable utility’

◮ Theoretical arguments against it include: King Lear and

the importance of having the last word (Hirshleifer, 1977); the Samaritan’s Dilemma (Bernheim and Stark, 1988); the controversial night-light (Bergstrom, 1989)

Dr Abigail Adams The Economics of The Family - Week 2

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Public Transfers & Income Pooling

◮ Unitary model implies that household decisions are not

affected by the identity of who receives public transfers/additional income —> targeting particular household members unnecessary

◮ However, policy makers seem to think differently....

“When the British child allowance system was changed in the mid-1970s to make child benefits payable in cash to the mother, it was widely regarded as a redistribution of family income from men to women and was expected to be popular with women.” Lundberg and Pollak

Dr Abigail Adams The Economics of The Family - Week 2

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The Evidence

“A theory is vindicable if its consequences are empirically valid to a useful degree of approximation; the empirical unrealism of the theory itself, or its assumptions, is quite irrelevant to its validity and worth .... [Yet] if the abstract models contain empirical falsities, we must jettison the models, not gloss over their inadequacies” Samuelson (1963)

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling

◮ Unitary model implies income pooling, i.e. who controls

what portion of the income should have no impact on household demands. Only total family income matters.

◮ Potential test: does giving women control over a larger

portion of the household budget change consumption behaviour?

◮ Idea: compare the demand behaviour of families in which

women contribute a large share of (earned/unearned) total income to families where they do not

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Econometric Issues

◮ Potential endogeneity of measures of control over income

in the household

◮ How much women earn and work is likely determined

jointly with household expenditures, and correlated with differences in preferences and wage rates

◮ E.g. Phipps and Burton: expenditures on eating out are

more elastic with respect to the wife’s than husband’s earnings.

◮ She gains more bargaining power and... women like eating

• ut more (?)

◮ Restaurant expenditures depend on the cost of substitutes,

and the wife’s wage is an important component of the cost

• f home prepared meals

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Lundberg, Pollak and Wales

◮ In the late 1970s, the UK changed the form of its universal

child benefit scheme, shifting receipt of the transfer from fathers (reduction in the amount withheld for taxes from paycheck) to mothers (cash payment) in two-parent families

◮ A “natural experiment” that provides an exogenous source

• f variation in the control of resources within the family

(and rather large ∼ 8% av. male earnings)

◮ Compare the ratio of children and women’s clothing

expenditures to men’s before and after the policy change

◮ Identification strategy: no time trends in relevant

• utcome variables.

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Lundberg, Pollak & Wales

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Duflo

◮ Might worry that time trends biasing LPW results ◮ Duflo (2003) looks at the impact of the introduction of

pensions for Black South Africans in 1993, which represented a substantial unexpected transfer of income for men older than 65 and women older than 60

◮ Many children live with their grandparents, although those

that do relatively disadvantaged on average

◮ Consider the impact on child weight-for-height (fast

reacting) and height-for-age (persistent)

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Duflo

◮ Step 1: Compare outcomes of children in eligible and

ineligible households

◮ Compare weight-for-height in households with no member

eligible for the pension, those in households with an eligible man, and those with an eligible woman (normalising differences by differences in the probability to receive pension)

◮ Also control for the presence of older ineligible household

members and for a further set of rich demographic variables to control for differences in background

◮ Identification strategy: no systematic differences in

nutrition between eligible and ineligible households with an elderly member

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Duflo

◮ Pensions received by women increase the

weight-for-height of girls by 1.19 standard deviations but did not significantly increase that of boys.

◮ Pensions received by men not associated with an

improvement in the nutritional status of girls nor boys

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Duflo

◮ Step 2: But what if there are still intrinsic differences

between eligible and ineligible households?

◮ Would hope to use a difference-in-differences identification

strategy but no time dimension to exploit (no representative surveys of African households before the end of apartheid)

◮ However, height-for-age reflects past nutritional history —

effectively, can create a panel dataset from the cross-section

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Duflo

◮ If households eligible for pensions have worse

characteristics than ineligible households, older children would be smaller in eligible households.

◮ If the pension program leads to better nutrition, children

measured when younger will have been better nourished for a larger fraction of their lives

◮ The younger children are, the smaller their relative

disadvantage should be in eligible households

◮ Strategy: compare the difference in height between

children in eligible and those in ineligible households among children exposed to the program for a fraction of their lives to the same difference amoung children exposed all their lives

Dr Abigail Adams The Economics of The Family - Week 2

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Income Pooling: Duflo

Dr Abigail Adams The Economics of The Family - Week 2

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Collective models

◮ Recognise the separateness of persons within the

households — how do individual preferences lead to collective choice?

◮ Cooperative models: household decisions are always

efficient

◮ Noncooperative models: cannot enter into binding and

enforceable contracts with each other. Instead, actions conditional on the actions of others.

Dr Abigail Adams The Economics of The Family - Week 2

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Cooperative models

Dr Abigail Adams The Economics of The Family - Week 2

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Cooperative models

◮ Can model household decision making problem as:

max

qA,qB,Q qA + µ(z)qB

s.t. p′(qA + qB) + P′Q = yA + yB

Dr Abigail Adams The Economics of The Family - Week 2

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Cooperative models

Dr Abigail Adams The Economics of The Family - Week 2

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Cooperative models

◮ Note that this doesn’t imply the absence of conflict, it

imposes that the solution leave no money left on the table

◮ Different models supply different threat points or leave the

bargaining model implicit

◮ Divorce threat point ◮ Noncooperative solution

◮ Cooperation seems ‘natural’ - long term relationships with

good information. Folk theorem arguments that with sufficient patience, Pareto efficient outcomes can be supported as a subgame perfect Nash equilibrium of a repeated game

Dr Abigail Adams The Economics of The Family - Week 2

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Noncooperative models - Example: Separate Spheres

◮ Lundberg & Pollak (1993): “each spouse makes decisions

within his or her own sphere" and responds to the other’s decisions by altering the level of voluntary contribution to shared, public goods

◮ Socially recognised and sanctioned gender roles assign

primary responsibility for certain activities to husbands and

• ther activities to wives

◮ Wife treats level of public good provided by husband as

fixed, and chooses quantities of her private good and public good subject to her own budget constraint. Same reasoning for husband.

◮ Decisions lead to a pair of best response functions that

determine a Cournot-Nash equilibrium un which public good contributions are inefficiently low

Dr Abigail Adams The Economics of The Family - Week 2

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Pareto Efficiency: Udry

◮ Unitary model cannot capture household decision making.

What about the evidence in favour of cooperative versus noncooperative models?

◮ Key difference: cooperative models lead to efficient

decisions

◮ Enrich model to introduce household production and the

notion that the household needs to maximise the size of the pie

◮ Pareto efficiency in this context — household first

maximises its total income and then shares this according to the set of bargaining weights that characterise the intrahousehold decision making process

Dr Abigail Adams The Economics of The Family - Week 2

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Pareto Efficiency: Udry

◮ Agricultural, often polygamous households in Burkina Faso

(1.8 wives per man)

◮ Men and women control different plots of land ◮ Can test if the allocation of resources across different plots

• f land is efficient

Dr Abigail Adams The Economics of The Family - Week 2

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Udry: Model

◮ Household production of good k

Y k =

• i∈Pk

G(Ni

F, Ni M, Ai) ◮ Household budget constraint

p′C = p′Y

Dr Abigail Adams The Economics of The Family - Week 2

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Udry: Model

◮ Pareto efficient allocation of resources solves

max

Cj,Ni

j ,Pk UF(·) + λUM(·)

subject to the budget and resource constraints

◮ Maximisation implies that the allocation of labour across

plots maximises total household output max

Ni

F ,Ni M

• i∈Pk

G(Ni

F, Ni M, Ai)

Dr Abigail Adams The Economics of The Family - Week 2

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Udry: Model

◮ If a crop is planted both on plots controlled by men, and on

plots controlled by women then must have that men and women have access to the same technology for producing that crop

◮ Should apply labour on each plot until the marginal product

• f labour is equalised across plots

◮ Thus, variations across plots in output and factor inputs

should be functions only of variation in plot characteristics, and so yield (production divided by size) of each plot should be independent of the owner of the plot

◮ Test: for a given year, household, and crop, is the yield a

function of the gender of the person who owns the plot?

Dr Abigail Adams The Economics of The Family - Week 2

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Udry: Empirics

◮ Yield (output per area)

Qk(Ai) = G(Ni

F, Ni M, Ai)

AA

◮ Taylor approximation (way of approximating a function)

Qk(Ai) ∼ Qk(¯ A) + ∂Qk(¯ A) ∂A (Ai − ¯ A)

◮ Leads to fixed effects estimation - estimate the deivation of

plot yield from mean yield as a function of the deviation of plot characteristics from mean plot characteristics within a group of plots planted with the dame crop by members of the same household in a given cropping season

Dr Abigail Adams The Economics of The Family - Week 2

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Udry: Empirics

◮ Generalise to control for other plot characteristics

Qhtci = Xhtciβ + γGhtci + λhtc + ehtci

◮ Xhtci = characteristics of plot i planted with crop c at time t

by member of household h

◮ λhtc is the household-year-crop fixed effect — restrict

attention to the variation in yields across plots planted with the same crop within a single household in a given year

Dr Abigail Adams The Economics of The Family - Week 2

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Udry: Results

◮ Finds that the household is not efficient — could achieve

an increase of 5.8% of production by reallocating inputs across plots

◮ Marginal product of land controlled by women is less than

that of similar land controlled by her husband

◮ Could produce more if either reallocated variable factors

from men to women or if all the land was given to the husband who then compensated the woman with a promised transfer of income....

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Summary

◮ Unitary model, whilst elegant and tractable, cannot be

reconciled with evidence on household decision making

◮ Collective models, especially cooperative models, have

become the norm in recent years

◮ However, unclear that the assumption of Pareto efficiency

is justified.

Dr Abigail Adams The Economics of The Family - Week 2