Commitment in Intertemporal Household Consumption: A Revealed Preference Analysis

43 Pages Posted: 14 Jan 2011

See all articles by L. Cherchye

L. Cherchye

KU Leuven; Erasmus Research Institute of Management (ERIM)

Bram De Rock

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Jeroen Sabbe

K.U. Leuven Campus Kortrijk - Subfaculty of Business and Economics; K.U. Leuven - Faculty of Business and Economics

Ewout Verriest

Catholic University of Leuven (KUL)-Kortrijk. Subfaculty of Economics and Business

Date Written: December 1, 2010

Abstract

We present a revealed preference methodology for analyzing intertemporal household consumption behavior. In doing so, we follow a collective approach, which explicitly recognizes that multi-member households consist of multiple decision makers with their own rational preferences. Following original work of Mazzocco (2007), we develop tests that can empirically verify whether observed consumption behavior is consistent with (varying degrees of) intrahousehold commitment. In our set-up, commitment means that households choose consumption allocations on the ex ante Pareto frontier. The distinguishing feature of our tests is that they are entirely nonparametric, i.e. their implementation does not require an a priori (typically non-verifiable) specification of the intrahousehold decision process (e.g. individual utilities). We demonstrate the practical usefulness of our methodology by means of an empirical application. For the data at hand, our results suggest using a so-called limited commitment model that allows for household-specific commitment patterns. Importantly, our application also shows that bringing intertemporal dynamics in the empirical analysis can substantially increases the discriminatory power of the revealed preference methodology.

Keywords: collective models of household consumption, intertemporal consumption, commitment, revealed preferences

JEL Classification: D11, D12, D13, C14

Suggested Citation

Cherchye, Laurens and De Rock, Bram and Sabbe, Jeroen and Verriest, Ewout, Commitment in Intertemporal Household Consumption: A Revealed Preference Analysis (December 1, 2010). Available at SSRN: https://ssrn.com/abstract=1740365 or http://dx.doi.org/10.2139/ssrn.1740365

Laurens Cherchye (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Bram De Rock

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Av. F. D. Roosevelt, 50
CP 114
Brussels, B-1050
Belgium

Jeroen Sabbe

K.U. Leuven Campus Kortrijk - Subfaculty of Business and Economics ( email )

Etienne Sabbelaan 53
Kortrijk, West-Vlaanderen 8500
Belgium

HOME PAGE: http://www.econ.kuleuven.be/jeroen.sabbe

K.U. Leuven - Faculty of Business and Economics

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://www.econ.kuleuven.be/jeroen.sabbe

Ewout Verriest

Catholic University of Leuven (KUL)-Kortrijk. Subfaculty of Economics and Business ( email )

Etienne Sabbelaan 53
Kortrijk, B-8500
Belgium

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