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Are you a Rotten Kid? Household decision-making Ruth Tarrant.

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1 Are you a Rotten Kid? Household decision-making Ruth Tarrant

2 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

3 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 Its unlikely that both partners will lose a job simultaneously

4 UK population statistics (1)

5 UK population statistics (2)

6 UK population statistics (3)

7 The household as a black box Paul SamuelsonGary Becker Yes! Blood is thicker than water – cohesion and mutual altruism Samuelson, 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

8 Who is the household head?

9 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?

10 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

11 parents are concerned not merely with their childrens utilities, but with their childrens 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)

12 Non-unitary decision-making models Non-cooperativeCooperative Models that allow for individual members of a household with different preferences influencing household decisions Separate SpheresBargaining models


14 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

15 Separate Spheres model - outcome

16 Cooperative models

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

18 Cooperative model Utility possibility frontier showing self-regarding preferences T shows the maximum utility each can achieve on their own Shaded 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?

19 Caring preferences (1)

20 Caring preferences (2)

21 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

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