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Endogenous household interaction

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  • Del Boca, Daniela
  • Flinn, Christopher

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 both short- and long-run constraints are binding for sizable proportions of households in the sample. We conclude that it is important to carefully model the constraint sets household members face when modeling household allocation decisions, and to allow for the possibility that efficient outcomes may not be implementable for some households.

Suggested Citation

  • Del Boca, Daniela & Flinn, Christopher, 2012. "Endogenous household interaction," Journal of Econometrics, Elsevier, vol. 166(1), pages 49-65.
    • Handle: RePEc:eee:econom:v:166:y:2012:i:1:p:49-65
    DOI: 10.1016/j.jeconom.2011.06.005
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    More about this item

    Keywords

    Household time allocation; Grim trigger strategy; Household production; Endogenous mixing distribution;
    All these keywords.

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D19 - Microeconomics - - Household Behavior - - - Other
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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