When inefficiency begets efficiency

Summary. Collective consumption decisions taken by the members of a household may prove inefficient. The impact on market performance depends on whether household inefficiencies are caused by inefficient net trades with the market or by inefficient distribution of resources within households. Inefficient internal distribution always results in inefficient equilibrium allocations. This leads us to consider competitive forces as disciplinary device for households. Competition of households for both resources and members can eliminate or reduce inefficient internal distribution.Received: 5 February 2003, Revised: 12 January 2004, JEL Classification Numbers: D10, D51, D62.This paper is an abbreviated and revised version of Gersbach and Haller (2003). It addresses issues raised during seminar presentations at the University of Texas, Austin, and the Center for Economic Studies (CES), Munich. The hospitality and financial support of CES, the Institute for Advanced Studies (IHS), Vienna, and the Institute of Economics, University of Copenhagen, is gratefully acknowledged. We thank Clive Bell for helpful comments and two referees for thoughtful suggestions.