Intra-Household Resource Allocation, Consumer Preferences and Commodity Tax Reforms: Australian Evidence

Empirical analysis of household expenditure behaviour has traditionally ignored the issue of resource allocation between household members, assuming that they have identical or unitary preferences. This paper relaxes that assumption, develops a household sharing rule and proposes intra-household demand systems that are able to identify differences in the preferences of members from conventional data. The resulting price and expenditure elasticities are used to demonstrate that collective demand models suggest different directions for commodity tax reforms to those implied by the traditional unitary model.     

Location decisions of a polluting firm and the time consistency of environmental policy

This paper considers location decisions of a monopolist, who faces a tax on its emissions in the home country, under ex post that is, time consistent, and ex ante, that is precommitment, environmental policies. We show that the monopolist will relocate more often under ex post optimal emission taxes. A government which cannot commit to an ex ante emission tax and sets its tax ex post after abatement effort has been chosen, is unable to affect the monopolist’s location decision, because it cannot commit to strategically reduce its tax level in the first stage. Domestic welfare is often higher under ex post emission taxes whenever the monopolist relocates under both policy regimes. Otherwise, welfare is higher under government commitment to an ex ante emission tax level. Thus, government commitment to a policy is not always welfare improving.     

Access Holidays and the Timing of Infrastructure Investment

For risky infrastructure investment, 'regulatory truncation' can diminish investment incentives. We model the truncation problem, showing the link to regulatory commitment, and derive optimal state-contingent access prices. If regulators cannot commit ex ante to specific ex post access prices then a regulatory commitment to a fixed period free of access – an access holiday – can improve investment incentives. We establish conditions under which an access holiday may improve investment timing and show how an optimal holiday depends on the underlying profit flows from the investment. In particular, we show that an optimal holiday may leave investors with positive expected economic profits.     

Household tax evasion

Household members share public goods and make intra-household transfers. We show how these features of the household interact with the tax evasion decision, and identify the dimensions in which household evasion differs from individual evasion. In the model we present two members of a household choose how much to contribute to a household public good and how much self-employment income to evade. We are interested in how different evasion possibilities interact with the contribution decisions to the household public good and the role of income transfers within the household. We show the household evasion decision differs from the individual decision because it affects the outcome of the household contribution game. When household members are taxed as individuals neutrality applies when choices are not constrained. If the evasion level of one household member is constrained then an income transfer can generate a Pareto improvement. When the household members are jointly taxed there is a couple constraint on strategies and corner solutions can emerge.     

The Collective Household, Household Production and Efficiency of Marginal Reforms

Most research on the welfare properties of taxes employs the unitary model of the household, ignoring household production. A simple model provides expressions for the changes in individual utility given marginal reforms to government policy. It is shown that the burden of a higher tax on household goods falls on the household member that consumes more than they produce or purchase. Numerical calculations show that price substitution (complementarity) between home and market labor increases (decreases) aggregate efficiency costs of a marginal redistribution of income without impacting the intra-household distribution of utility changes. Modeling household goods as public versus private can alter the distributional consequences of marginal reforms.     

RETAIL PRICE REGULATION AND THE OPTION TO DELAY

ABSTRACT ** :  This paper examines a two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we consider a monopolist who faces no downstream (final good) competition but is subject to retail price regulation. We identify the welfare-maximizing regulated prices when the unregulated market outcome is set as the benchmark. We show that if the regulator can commit to ex post regulation – that is, regulated prices that are contingent to future demand realization – then regulated prices that allow the firm to recover its total costs of production are welfare-maximizing. Thus, under ex post price regulation there is no need to compensate the regulated firm for the option to delay that it foregoes when investing today. We argue, however, that regulators cannot make this type of commitment and, therefore, price regulation is often ex ante – that is, regulated prices are not contingent to future demand. We show that the optimal ex ante regulation, and the extent to which regulated prices need to incorporate an option to delay, depend on the nature of demand uncertainty.     

COMMITMENT AND COSTLY SIGNALING IN DECENTRALIZED MARKETS

I propose a search model of a decentralized market with asymmetric information in which sellers are unable to commit to asking prices announced ex ante. Relaxing the commitment assumption prevents sellers from using price posting as a signaling device to direct buyers' search. Private information about the gains from trade and inefficient entry on the demand side then contribute to market illiquidity. Endogenous sorting among costly marketing platforms can facilitate the search process by segmenting the market to alleviate information frictions. Seemingly irrelevant but incentive compatible listing fees are implementable provided that the market is not already sufficiently active.     

A test of a unitary model on labour supply using the information of household decision-making systems

This article tests whether a unitary model is consistent with household behaviour using the data of two-earner couples. It focuses on the unitary model assuming that all family members have the same utility function. The analysis investigates the difference in a husband's and wife's labour supply between the household that determines the wife to be the main decision-maker and the household that selects a different decision-making system under the control of individual and household characteristics. The estimation employs a treatment effects model to consider the selectivity bias caused by unmeasured characteristics. Results show that the household with the wife as the main decision-maker increases the husband's working hours by 15% and decreases the wife's working hours by 59%, compared to the household that selects a different decision-making system. This implies that the unitary model is rejected. Additionally, the husband's wage rate, the husband's and wife's health status, and their gambling addiction determine the household decision-making system such as the variables that determine the reservation utility of not being married. The effect of the decision-making system on the labour supply and that of the determinant factors on the decision-making system are consistent with the implications obtained from Nash bargaining models and collective models.     

Commodity Rates of Interest and Intertemporal Substitution in Commodity Demand and Consumption

This paper examines the role of commodity own rates of interest in intertemporal analysis of consumer behaviour and presents a disaggregate analysis of intertemporal substitution in commodity demand and consumption. Commodity rates of interest are defined from the Euler equations implied by the intertemporal consumer choice problem. The relationship between commodity own rates and the real interest rate is derived, and the conditions for equality of commodity own rates are discussed. The intertemporal commodity substitution elasticities are characterised using commodity rates of interest, and the intertemporal substitution elasticity of consumption is derived from its constituent commodity demands. Evidence from estimation of the demand system and the consumption function reveals high intertemporal substitution for consumer goods as well as consumption.     

Microfinance and gender empowerment

In this paper, we develop a theoretical model of household production, bargaining and credit to analyse how access to microcredit affects intra-household decision-making and welfare, and identify conditions under which female household members are most likely to benefit. We show that, consistent with ethnographic accounts of the impact of microcredit programmes on poor households, access to loans can lead to a variety of outcomes for intra-household decision-making and welfare depending on initial conditions and that, in some instances, women borrowers may experience a decline in welfare. We identify two instances in which a woman is most likely to benefit: when there is scope for investing the loan profitably in a joint activity, and when a large share of the household budget is devoted to household public goods.     

Saving and the intra-household distribution of income: an empirical investigation

This paper presents an empirical analysis of the relationship between household saving and the distribution of income within the household. Various theoretical reasons why the level of saving might depend on the latter are given. Some of these can be rationalized within the usual “unitary” model of household decision but others recognize explicitly that different members of the household may have different preferences about how much to save.Particular attention is paid to saving for retirement since the facts that wives are, on average, younger than their husbands and women have longer life expectancies means that wives typically anticipate a longer retirement period than their husbands. Thus wives may prefer to save more for retirement than their husbands.The empirical analysis uses a sample of Canadian households from five Family Expenditure Surveys. These surveys include measures of financial saving as well saving in retirement accounts. After accounting for many of the other influences on saving (for example: age, household composition, occupation and education levels but not household income) we find some effects of the intra-household distribution of income on savings rates. The parameter estimates suggest that the household saving rate decreases with the share of the wife in household income.     

And the winner is... An empirical evaluation of unitary and collective labour supply models

An empirical evaluation is presented of two competing flexible labour supply models. The first is a standard unitary model, while the second is based on the collective approach to household behaviour. The evaluation focuses on the testing of the model’s? theoretical implications and on their ability to identify structural information, like preferences and the intrahousehold allocation process. Models are applied to Dutch microdata from the DNB Household Survey. The unitary model cannot be rejected for male and female singles, while it is rejected for a sample of couples. The alternative collective model cannot be rejected for the same sample, allowing identification of individual preferences and an intrahousehold sharing rule that can be used as a basis for welfare economic policy evaluations.     

An Afriat Theorem for the collective model of household consumption

We provide a nonparametric ‘revealed preference’ characterization of rational household behavior in terms of the collective consumption model, while accounting for general individual preferences that can be non-convex. Our main result is the Collective Afriat Theorem, which parallels the well-known Afriat Theorem for the unitary model. First, it provides a characterization of collectively rational consumption behavior in terms of collective Afriat inequalities. Next, it implies the Collective Axiom of Revealed Preference (CARP) as a testable necessary and sufficient condition for data consistency with collective rationality. Finally, the theorem has some interesting testability implications. With only a finite set of observations, the nature of consumption externalities (positive or negative) in the intra-household allocation process is non-testable. The same non-testability conclusion holds for privateness (with or without externalities) or publicness of consumption. By contrast, concavity of individual utility functions (representing convex preferences) turns out to be testable. In addition, monotonicity is testable for the model that assumes all household consumption is public.     

Bargaining In International Trade Under Exchange-Rate Uncertainty

This paper examines the implications of various contracting alternatives between exporting and importing firms on the volume of international transactions. the contracts that we study are determined in a bargaining situation under exchange-rate uncertainty. First we look at contracts which entail an ex ante commitment on price and quantity of exports without the possibility of renegotiation ex post. Second, spot contracts, i.e., the price and the quantity of exports are negotiated after the exchange the rate is known. A third type of contracts consists of ex ante commitment and ex post renegotiation.     

Mutual Insurance,Individual Savings,and Limited Commitment

We examine a dynamic model of mutual insurance when households can also engage in self-insurance by storage. We assume that there is no enforcement mechanism, so that any insurance is informal and must be self-enforcing. We show that consumption allocations satisfy a modified Euler condition and that an enhanced storage technology can either improve or diminish welfare. Furthermore we show that the ex ante transfers introduced into dynamic informal insurance models recently by Gauthier et al. (Gauthier, C., Poitevin, M., and González, P. (1997). Journal of Economic Theory76, 106–144) are only used here in the first period, with the role of ex ante transfers being replaced by differential individual storage. Journal of Economic Literature Classification Numbers: C61, C73, D90, E21.     

HOW DO SPOUSES SHARE THEIR FULL INCOME? IDENTIFICATION OF THE SHARING RULE USING SELF‐REPORTED INCOME

The paper applies the collective model to the analysis of intra-household inequality using one of the subjective-qualitative questions available in the RLMS (Russia Longitudinal Monitoring Survey) data, and provides a test for its assumptions. Interpreting the individual answers as reported budget scales we assume a correspondence between the budget level that household members report and their true income sharing. We first show that this assumption is supported by the data, and then use couples who report the same level of budget to identify the full sharing rule for the whole sample.     

Ex ante valuation of atmospheric visibility

In a world incomplete markets for environmental goods, ex ante planned expenditures rather than ex post realized outcomes explain the values which individuals attach to these goods. We use the distance function to develop restrictions from a model of ex ante consumer behaviour involving these goods. A Contigent valuation approach is then employed to estimate policy-relavant components of the ex ante economic values that recreationists attach to differing subjective probabilities of alternative atmospheric visibility levels at a wilderness location and at an urban location in Oregon. Marginal valuations of probability changes are similar at the two sites. Marginal rates of time preference for resolving uncertainities vary between 10 and 50% and are inversely related to education. Existence value averages 10% of total value, and evidence is mixed that site-specific value act as surrogates for general environmental preferences.     

Increasing consumer well-being: risk as potential driver of happiness

This article investigates the relation between risk and individual well-being. We propose a theoretical model of happiness that makes a distinction between ex ante evaluations of happiness and ex post assessments. The main assumptions of the model are tested through three studies based on anchoring vignettes. We show that, even if, ex ante, consumers fear high risk and do not associate it to a high level of happiness, their ex post evaluation of well-being is generally higher when identical consequences result from a high-risk situation than from a low-risk situation. Control over risk-taking reinforces the gap between ex ante and ex post measures of happiness. Thus, our article provides empirical evidence about a positive relation between risk and individual well-being, suggesting that risky experiences have the potential to increase consumer well-being.     

Ordinary Shares and Managers

We argue that ordinary shares undermine any inherent commitment of its holders to resist renegotiating away ex post inefficiencies. Yet, in a dynamic adverse selection problem, such ex post inefficiencies are optimal from an ex ante point of view. We show that shareholders may use a manager in combination with a golden parachute (managerial severance payments) as a commitment device not to renegotiate ex post.     

What explains consumption in the very short-run? Evidence from checking account data

This paper investigates consumption behavior within an intertemporal optimization model of the representative household. Our dataset consists of deposits and withdrawals from individual household checking accounts that received paychecks by direct deposit. We construct samples of panel data for households with weekly, biweekly, and semi-monthly pay-periods and form two different measures of consumption for each sample. GMM estimates of structural parameters provide mixed evidence for habit formation or durability and limited support for the permanent income hypothesis. The results instead point to “rule of thumb” consumption under liquidity constraints, where the household consumes its current disposable income each pay-period with possible debt servicing. These findings are uniform with regard to estimation of sub-samples split according to age or household income.