Endogeneous Household Interaction

51 Pages Posted: 8 Jan 2010 Last revised: 15 Jan 2010

See all articles by Daniela Del Boca

Daniela Del Boca

University of Turin - Department of Economics; IZA Institute of Labor Economics; Centre for Household, Income, Labour and Demographic Economics (CHILD)

Christopher J. Flinn

New York University -Leonard N. Stern School of Business - Department of Economics; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2009

Abstract

Most econometric models of intrahousehold behavior assume that household decision making is efficient, i.e., utility realizations lie on the Pareto frontier. In this paper we investigate this claim by adding a number of participation constraints to the household allocation problem. Short-run constraints ensure that each spouse obtains a utility level at least equal to what they would realize under (inefficient) Nash equilibrium. Long-run constraints ensure that each spouse obtains a utility level at least equal to what they would realize by cheating on the efficient allocation and receiving Nash equilibrium payoffs in all successive periods. Given household characteristics and the (common) discount factor of the spouses, not all households may be able to attain payoffs on the Pareto frontier. We estimate these models using a Method of Simulated Moments estimator and data from one wave of the Panel Study of Income Dynamics. We find that, while short run constraints are binding for a sizable set of agents in the sample, long-run constraints are not. Thus gains from efficient behavior are large enough, and households forward-looking enough, to prevent deviations from efficent outcomes. We conclude that it is important to account for a variety of possible implementation constraints when determining efficient household outcomes, even if some subset of the constraints are ultimately found to be non-binding when the model is estimated in a logically-consistent fashion.

Keywords: Household Time Allocation, Grim Trigger Strategy, Household Production, Method of Simulated Moments

JEL Classification: C79, D19, J22

Suggested Citation

Del Boca, Daniela and Flinn, Christopher J., Endogeneous Household Interaction (February 1, 2009). MFI Working Paper No. 2009-01. Available at SSRN: https://ssrn.com/abstract=1533510 or http://dx.doi.org/10.2139/ssrn.1533510

Daniela Del Boca (Contact Author)

University of Turin - Department of Economics ( email )

Via Po, 53
Torino, 10124
Italy

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Household, Income, Labour and Demographic Economics (CHILD)

Turin, TO
Italy

Christopher J. Flinn

New York University -Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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