Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications

Efficient Intra-Household Allocations and

Distribution Factors: Implications and
Identifications

Written by mixingale@twitter for private study

June 24, 2010

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Introduction

Main Results: Testability

◮ Derive testable implication of collective model with Pareto efficiency

assumption when not having price variation
◮ consistent with all possible assumptions on private/public nature of
goods, all possible consumption externalities between household
members, and all types of interdependent individual preferences and
domestic production technology
◮ necessary and sufficient
◮ combining with test on unitary model, it allows to check either of
unitary/collective assumption and Pareto efficiency assumption
◮ assuming bargaining model gives additional testable implication

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Introduction

Main Results: Identification

◮ Gives a series of identification conditions of individual Engel curves

(6= preferences? Or, possible, w.l.o.g?) and decision process when
not having price variation
◮ price variation + labor supply: Chiappori (1992), Blundell, Chiappori,
Magnac and Meghir (2000), Chiappori, Fortin and Lacroix (1992)
◮ no price vavriation + exclusive/assignable good: Browning,
Bourguignon, Chiappori, and Lechene (1994)

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Model

Notation

◮ two people A and B

◮ n marketable consumption goods, private or public
◮ q m ∈ R+n , m = A, B: a vector of private consumption
◮ Q ∈ R+n : a vector of public consumption
◮ q ≡ qA + qB , C ≡ q + Q
◮ no price variation → normalize all prices to 1: budget constraint:

e ′ (q A + q B + Q) = e ′ C = x

where x is a total income

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Model

Preference, Distribution Factor

◮ individual preferences:

u A (q A , q B , Q; a), u B (q A , q B , Q; a)

where a is a preference factor: a vector of characteristics affects

preferences directly
◮ three times differentiable, strictly convex (means convex preference?)
◮ private consumption of each member can enter the preferences of
the other
◮ Definition 1: A variale zk is a distribution factor if it does not enter
individual preferences nor the overall household budget constraint
but it does influence the decision process

◮ “decision process” seems not well-defined and thus “distribution
factor” either
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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Model

z-Conditionl Demands
◮ Cj ≡ ξj (x, a, z): household demand function for good j
◮ Axiom 1: There is at least one good j and one observable
distribution factor zk such that ξj (x, a, z) is strictly increasing in zk
◮ by strict monotonicity,

z1 = ζ(x, a, z−1 , C1 )

◮ for i 6= j,

Ci = ξi (x, a, z1 , z−1 , z−1 ) = ξi [x, a, ζ(x, a, z−1 , C 1), z−1 ] = θi (x, a, z−1 , C1 )

◮ refer to θi as z-conditional demand

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Model

Add Unobserved Terms

◮ demand:

Ci = ξi (x, a, z, ǫi )

◮ z-conditional demand:
Ci = ξi (x, a, z1 , z−1 , ǫi )
= ξi [x, a, ζ(x, a, z−1 , C1 , ǫ1 ), z−1 , ǫi ]
= θi (x, a, z−1 , C1 , ǫ1 , ǫi )

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Unitary Rationality

◮ Definition 2: Let (q A , q B , Q) be given demand functions of

(x, a, z). These are compatible with unitary rationality if there exists
a utility function U(q A , q B , Q; a) such that, for every (x, a, z), the
vector (q A , q B , Q) maximizes U(·) subject to the budget constraint


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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Test on Unitary Rationality

◮ Proposition 1: A given system of demand functions is compatible
with unitary rationality ⇔ it satisfies:

∂ξi (x, a, z)
= 0, ∀i, k
∂zk


◮ Remark:
◮ consider a collective model in which the household maximized a
weighted sum of individual utilities
◮ suppose that the weight is dependent on income but not on
distribution factor
◮ it is not unitary model in a strict sense but is observationally
equivalent to a unitary model under the current setting

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Collective Ratinality

◮ Definition 3: Let (q A , q B , Q) be given functions of (x, a, z). These

are compatible with collective rationality if there exist two utility
functions u A (q A , q B , Q; a) and u B (q A , q B , Q : a) such that, for every
(x, a, z), the vector (q A , q B , Q) is Pareto efficient. That is, for any
other bundle (e qA , e e such that
q B , Q)

u m (eqA , e e a) ≥ u m (q A , q B , Q; a), m = A, B
q B , Q;
qA + q
⇒e ′ (e eB + Q) e > e ′ (q A + q B + Q)


◮ it should require that u (e
q ,e e a) > u (q , q , Q; a) for at least
q , Q; m A B m A B

one m? anyway, strictly convex preferences will imply unique

maximizer of u and so imply this

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Test on Collective Rationality

◮ Proposition 2: Consider a point P = (x, a, z) at which

∂ξi /∂z1 6= 0, ∀i. Without a priori restrictions on individual
preferences u m (q A , q B , Q; a), m = A, B, a given system of demand
functions is compatible with collective rationality in some open
neighborhood of P ⇔ K = 1 or it satisfies any of the following
equivalent conditions:
(i) there exists real value functions Ξ1 , · · · , Ξn and µ such that:

ξi (x, a, z) = Ξi [x, a, , µ(x, a, z)], ∀i

◮ continue to the next page

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Test on Collective Rationality

(ii) household demand functions satisfy:

∂ξi /∂zk ∂ξj /∂zk

= , ∀i, j, k, l
∂ξi /∂zl ∂ξj /∂zl

(iii) there exists at least one good 1 such that:

∂θi (x, a, z−1 , q1 )

= 0, ∀i 6= 1, k 6= 1
∂zk

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Intuition behind Test on Collective Rationality

◮ distribution factors affect consumption but only through their effect

upon the location (the weight µ) of the final outcome on the Pareto
frontier
◮ this effect is one-dimensional
◮ fixing one value of the distribution factor z1 and hence µ, the others
have no further effect

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Bargaining Model

◮ bargaining framework impose additional restrictions

◮ Chiappori and Donni (2006)
◮ additional restrictions on the bargaining process and specifically on
the nature of the status quo point
◮ any efficient outcome can be constructed as a bargaining solution for
well-chosen status quo values

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Testability

Test on Bargaining Model

◮ consider specific assumption as an example:

◮ some distribution factors are known to positively
(negatively)correlated with member B’s threat point
◮ then the weight on B, µ should be increasing (decreasing) in the
factor
◮ Proposition 3: Assume that µ is known to be increasing in z1 and
decreasing in z2 . Then, the demand functions consistent with any
bargaining model are such that:

∂ξi /∂z1 ∂ξj /∂z1

= ≤ 0, ∀i = 1, · · · , n, j = 1, · · · n
∂ξi /∂z2 ∂ξj /∂z2

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Separability

Focus on Caring Preference

◮ impose separability in the preferences of the two household members

◮ refer to the resulting restricted preference as caring:

(16) u m (q A , q B , Q; a) = ψ m [φA (q A , Q; a), φB (q B , Q; a); a]

◮ call φm m’s felicity function

◮ no externalities for individual felicities
◮ altruism works only through their felicity functions

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Separability

Focus on Private Good

◮ exclude public good Q or assume separability in private/public good

and condition on Q:

(17) φm (q m , Q; a) = f m [v m (q m ; a), Q; a]

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Sharing Rule Approach

◮ in the followings assume z is a scalar w.l.o.g

◮ Proposition 4 Let (q A , q B ) be functions of (x, a, z) compatible with
collective rationality, (16) and (17). Then, there exists a function
ρ(x, a, z) such that q m is a solution to

v m (q m ; a) s.t. e ′ q m = x m

where
x A = ρ(x, a, z)
x B = x − ρ(x, a, z)

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Implication on the Demand (General)

◮ Proposition 5: Assume collective rationality, (16) and (17). Then,

(i) there exists a real-valued function ρ and 2n real-valued functions αi
and βi s.t. for i = 1, · · · , n,

(18) qi (z, x) = αi [ρ(z, x)] + βi [x − ρ(z, x)

(ii) there exist two real-valued functions F and G s.t. for ∀t, s ∈ R+ ,
i = 2, · · · , n,

θi [t + s, F (t) + G (s)]
(19)
= θi [t, F (t) + G (0)] + θi [s, F (0) + G (S)] − θi [0, F (0) + G (0)]

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Exclusive and Assignable Good

◮ Assignable goods: goods for which we can observe how much each
person consumes
◮ Exclusive goods: goods for which consumed by one person only
◮ an exclusive good is assignable
◮ an assignable good can be regarded as a pair of exclusive goods
◮ with price variation, they are regarded as two exclusive good with the
same price
◮ without price variation, there is no such restriction

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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Identification of Sharing Rule (One Exclusive Good)

◮ Proposition 6: Assume collective rationality, (16) and (17). If the

consumption of exactly one exclusive good (for, say, A) is observed,
and if the demand function of member A for this good is strictly
monotone, then we can recover the sharing rule ρ(z, x) up to a
strictly monotone transformation. That is, if ρ(z, x) is one solution,
then any solution is of the form F [ρ(z, x)] where F is strictly
monotone.


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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Implication on the Demand (Two Exclusive Goods)

◮ Proposition 7: Assume collective rationality, (16) and (17).
Assume that good 1 is exclusive for A and 2 for B. Consider an
open set on which ∂θ2 /∂x 6= 0, ∂θ2 /∂q1 6= 0. Then, the following
equivalent conditions hold:
(i) there exists a function F s.t. ∀s, t ≥ 0,
(20) θ2 [t + s, F (t)] = θ2 [s, F (0)]

(ii) there exist two functions β and g s.t.

(21) θ2 (x, q1 ) = β[x − g (q1 )]

(iii) θ2 satisfies
∂ h ∂θ2 /∂q1 i
(22) =0
∂x ∂θ2 /∂x


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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Identification of the Sharing Rule (Two Exclusive Goods)

◮ Proposition 8: Assume collective rationality, (16) and (17).
Assume that good 1 is exclusive for A and 2 for B. Assume that the
direct demand for both goods are observed and that the
corresponding z-conditional demand for good 2 fulfills the necessary
conditions of Proposition 7. Then, the sharing rule is given, up to an
additive constant, by the following equivalent differential equations:
(i)
∂θ2 /∂q1
(24) g ′ (q1 ) = − , ρ(x, z) = g [q1 (x, z)]
∂θ2 /∂x

(ii)
∂q1 /∂x
∂ρ ∂q1 /∂z ∂ρ 1
(25) = ∂q1 /∂x
, =
∂x
∂q1 /∂z
− ∂q 2 /∂x
∂q2 /∂z
∂z ∂q1 /∂x
∂q1 /∂z
− ∂q2 /∂x
∂q2 /∂z


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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Implication on the Demand (One Exclusive Good)

◮ Proposition 9: Assume collective rationality, (16) and (17). Assume
that good 1 is exclusive for A and that good 2 is private joint
consumption good. Consider an open set on which ∂ 2 θ2 /∂ 2 x 6= 0
and ∂ 2 θ2 /∂x∂q 6= 0. Then, the following, equivalent properties hold:
(i) there exists a function F s.t. ∀s, t > 0,
(26) θ2 [t + s, F (t)] = θ2 [t, F (t)] + θ2 [s, F (0)] − θ2 [0, F (0)]

(ii) there exist three functions α, β, and g s.t.

(27) θ2 (x, q1 ) = α[g (q1 )] + β[x − g (q1 )]

(iii)
∂ h ∂ 2 θ2 /∂x∂q i
(28) =0
∂x ∂ 2 θ2 /∂x 2


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Efficient Intra-Household Allocations and Distribution Factors: Implications and Identifications
Identifiability

Identification of Individual Engel Curves

◮ differentiate (18) w.r.t. z and x gives:
∂qi ∂ρ
= (α′i − βi′ )
∂z ∂z
∂qi ′ ′ ∂ρ
= (αi − βi ) + βi′
∂x ∂x

◮ solve this for α′i and βi′ to get:

∂ρ/∂z∂qi /∂x + (1 − ∂ρ/∂x)∂qi /∂z

α′i =
∂ρ/∂z
∂ρ/∂z∂qi /∂x − ∂ρ/∂x∂qi /∂z
βi′ =
∂ρ/∂z

◮ given the partial derivatives of ρ, αi and βi (individual Engel curves)

are identified up to a constant
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