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

Introduction Unitary Unitary Model “The family is a remarkable institution. And a complex one. 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

Introduction Unitary 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

Introduction Unitary Rotten Kid Theorem (Becker, 1974 & 1981) Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary 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 out more (?) ◮ Restaurant expenditures depend on the cost of substitutes, and the wife’s wage is an important component of the cost of home prepared meals Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary 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 of 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 outcome variables. Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary Income Pooling: Lundberg, Pollak & Wales Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary 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

Introduction Unitary Income Pooling: Duflo Dr Abigail Adams The Economics of The Family - Week 2

Introduction Unitary 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