Are you a Rotten Kid?

Household decision-making

Ruth Tarrant

“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, Cambridge: MA, Harvard University Press

Why live in a multi-person household? Economies of scale in z-goods Gains from comparative advantage

Different household members are better at different activities

Implicit loans A husband may continue to work and fund his wife

through a course, for example Savings

One partner may work and build up savings that can be used by the other

Risk-pooling It’s unlikely that both partners will lose a job

simultaneously

UK population statistics (1)

UK population statistics (2)

UK population statistics (3)

The household as a black box

Paul Samuelson Gary Becker

Yes!

“Blood is thicker than water” – cohesion and

mutual altruismSamuelson, P (1956) ‘Social Indifference Curves’ The Quarterly Journal of Economics, 70(1) pp.1-22

Maximise the utility of the

altruistic household head

Becker, G.S. (1974) ‘A theory of social interactions’, Journal of Political Economy 82(6) pp.1063-1093

Who is the household head?

Your family

Who has the greatest decision-making power?

Who earns the most?

Are the two linked?

What other factors affect the balance of decision-making power in your household?

Who is the household head?

Becker: main ‘breadwinner’ Whoever earns more has control over their own

money and that of their spouse Not so!

2005-06 Indian National Family Health Survey 80% households: male breadwinner 10% households : female breadwinner 10% households: male and female equal breadwinners

Decision-making: 2.2% women controlled resources 24% women had sole control over their earnings

“parents are concerned not merely with their children’s utilities, but with their children’s consumption patterns (e.g. parents may be willing to pay for college tuition or a down payment on a house, but not a Mercedes or a trip around the world)”

Non-unitary decision-making models

Non-cooperative Cooperative

Models that allow for individual members of a household with different preferences influencing

household decisions

Separate Spheres Bargaining models

Separate Spheres model - assumptions Couple behaving according to ‘traditional’

gender roles Man contributes money from paid work Woman contributes time to the household

Both get utility from z-goods They have to decide how much money/time to

contribute to producing z-goods, either L (low) or H (high)

One-shot game

Separate Spheres model - outcome

Cooperative models

Cooperative models

Collective model: maximise a household utility function, which is a combination of all household members’ utility functions

Cooperative modelUtility possibility frontier showing self-regarding preferencesT shows the maximum utility each can achieve on their ownShaded area shows outcomes that are preferred to T by at least 1 partner

What factors do you think affect the

position of the threat point,

T?

Caring preferences (1)

Caring preferences (2)

Which model gets your vote? Gary Becker (Rotten Kid)

One altruistic household head allocates resources Paul Samuelson (Black Box)

Everyone in the household agrees how to allocate resources

Separate Spheres Specialise according to comparative advantage

but do as little as possible Bargaining model (co-operative model)

Resource allocation depends on relative bargaining power of household members