UNIVERSITY COLLEGE LONDON
DEPARTMENT OF ECONOMICS
Economics BSc (Econ)
Third Year – Term 1
TOPICS IN HOUSEHOLD
ECONOMICS
ECON0115
Rodrigo Antón García
rodrigo.garcia.20@ucl.ac.uk
London, 2022
,
, Contents
Topic 1 – Income Pooling I.
o Topic 1.1 – Income Pooling. 1
o Topic 1.2 – Budget Constraints. 2
o Topic 1.3 – Analyzing Data. 4
Topic 2 – Income Pooling II.
o Topic 2.1 – Income Pooling and Observational Data. 7
o Topic 2.2 – Income Pooling and Quasi Experimental Data. 10
o Topic 2.3 – Engel Curves. 12
o Topic 2.4 – Experimental Data. 13
o Topic 2.5 – More on Engel Curves. 18
o Topic 2.6 – Other Topics and Conclusions. 19
Topic 3 – The Unitary Model of Choice.
o Topic 3.1 – What Are Households and What Do They Do? 20
o Topic 3.2 – How to Model Household Choice? 23
o Topic 3.3 – The Unitary Model for Household Choices. 25
Topic 4 – Household Choice and the Unitary Model.
o Topic 4.1 – Justification of the Unitary Model. 26
o Topic 4.2 – Taking the Model to the Data. 27
Topic 5 – The Unitary Model.
o Topic 5.1 – Preference Heterogeneity. 34
o Topic 5.2 – Distribution Factors. 36
,Topic 6 – Non-Unitary Models: The Gains from Marriage.
o Topic 6.1 – The Gains from Marriage. 37
o Topic 6.2 – Sharing of Public Goods. 37
o Topic 6.3 – Specialization Within the Household. 39
o Topic 6.4 – Within-Household Credit (Imperfect Credit Markets). 40
o Topic 6.5 – Risk-Sharing. 41
o Topic 6.6 – Children. 42
o Topic 6.7 – Conclusions About Gains from Marriage. 44
Topic 7 – Non-Unitary Models: Preferences, Household Production, Decision
Making.
o Topic 7.1 – Preferences. 46
o Topic 7.2 – Household Production. 48
o Topic 7.3 – Decision Making: The Unitary Model, Non-Cooperative Models and
Cooperative Models. 49
Topic 8 – Non-Unitary Models: The Collective Model.
o Topic 8.1 – The Collective Model. 51
o Topic 8.2 – Conclusions About Models of Household Decision Making. 54
Topic 9 – Measurement of Individual Poverty Using the Collective Model I.
o Topic 9.1 – Why and How to Measure Individual Poverty. 55
o Topic 9.2 – A Simple Collective Model of Household Decision Making. 58
Topic 10 – Measurement of Individual Poverty Using the Collective Model II.
o Topic 10.1 – Measuring Resource Shares. 62
o Topic 10.2 – Missing Women in India. 63
,ECON0115 – Topics in Household Economics Rodrigo Antón García
ECON0115: TOPICS IN HOUSEHOLD ECONOMICS
Topic 1 – Income Pooling I.
o Topic 1.1. – What Is Income Pooling?
Consider the following question,
Do mothers and fathers pool resources?
The answer is obvious to lay people and to scientists of human behaviour other than
economists (psychologists, sociologists, etc.) but until recently, the answer was not
obvious to economists. This is because even though economists have a model of choice
(the budget constraint model), this model could not be used to answer this question.
Income pooling refers to making consumption decisions based on the combined income
of the household. It means that the way in which the household uses income depends
only on the level of the completely pooled income and not on the origin of the income.
Whether when you redistribute between them, they are going to make the same choices,
given the total level of expenditure remains the same.
Suppose you and your friend “pool” your lunch money.
What does it mean in terms of observed choices of lunch?
If I give £1 to the mother in a household,
will it be spent in the same way as if I give £1 to the father?
Income pooling may occur when there is a joint bank account, but this is not sufficient.
Men and women in a marriage may have different preferences in their spending and they
may choose to spend their ‘spending decisions’ in different ways. Also, typically, one
person will have more power in deciding what to consume if there is coercion in place.
Moreover, even if they have the same preferences, these are not homothetic, and hence
couples would choose different amounts of consumption depending on their relative
position at the margin. Imagine a total amount of 100 where one person earned 100 and
the other 0, if now one person earns 99 and the other 1, this second person would value
this pound at the margin differently from the first person even if they shared preferences.
Thus, despite them giving off the same consumption preference from 100 to 99, and
selecting the same consumption preferences from 0 to 1, since they can find themselves
in different position at the margin, they will not spend their income in the same way. Note
that if preferences were equal and there was heterogeneity income pooling would exist.
So, couples do not tend to spend on the same things, making this an important question.
For example, when considering the implementation of competing projects, policymakers
may prefer to allocate our existing scarce resources to particular members of society to
achieve a greater positive effect of the respective policy. If we consider the results of
giving extra income to either men or women, the effect of this policy will be different
depending on who gets such income, and of course, we would like to measure this.
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,ECON0115 – Topics in Household Economics Rodrigo Antón García
Some other points that highlight why income pooling is an important question:
- Social welfare concerns individuals, not households (e.g., child, disability, etc.)
- Shapes the design and the evaluation of policies which concern individuals.
- People spend money depending on its source i.e., it is labelled as child benefit.
- Targeting is potentially important in terms of costs and benefits of policies
- It is difficult to argue for targeting in the absence of quantified evidence
One of the most famous papers covering income pooling is Jan Pahl, Social Policy,
“Money and marriage”, which concluded that households tend not to pool resources.
Therefore, most commonly economists conclude that, resources are not pooled. And so,
for example, targeting cash transfers to women tend to promote: gender equality,
empowerment of women and higher spending on children. This is the basis for many
Conditional Cash Transfer programmes i.e., Bolsa Familia in Brazil, Oportunidades in
Mexico or Familias en Accion in Colombia.
Overall, it is key to understand that income pooling concerns behaviour. Joint bank
accounts are not sufficient for income pooling: one person could have more power over
the other and restrict the usage. Thus, income pooling ultimately refers to redistribution
between household members that doesn’t yield a change in the behaviour of households.
What are the tools that economists have to investigate this income pooling?
- Models of decision making (The theory of choice)
- Data on choice
- How are economists different from other scientists of human behaviour?
Note the question can be reformulated in terms of the objects that economists work with:
If there is income pooling, only the sum of incomes matter for choices.
o Topic 1.2 – The Budget Constraint.
The budget constraint has the form of ∑! "! #! ≤ 0, where consumers purchase goods #
from within a commodity space which is typically, # ≥ 0; and choices are constrained to
lie within budget set B of affordable bundles.
In the linear case: prices " are constant and total spending remains within budget '.
- The vector notation is usually used: "’ # ≤ '.
#
- The maximum affordable quantity of any good is #!∗ = $
!
%& $
- The slope of budget constraint: %& ! = − $ ! .
" "
Essentially, the budget constraint explains how many good j’s you have to give up to buy
one good. Also note that the slope is independent of the budget and it is always constant.
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,ECON0115 – Topics in Household Economics Rodrigo Antón García
In this model choices result from the relationship between preferences and budget
constraint. The marginal rate of substitution (MRS) which equals to the price ratio or
marginal rate of transformation (MRT) depicts this relationship. For a complete analysis
of the budget constraint see ECON0013 Term 2 Notes.
When the house is comprised of two member the budget constraint is,
"' #' + "( #( = ' = ') + -' ℎ' + -( ℎ(
where the LHS is the household expenditure on goods, the RHS is household income
(the sum of non-labour income ') , and labour income of each member is -! ℎ! for / = 1,2.
Hence, -! is the market wage and ℎ! the hours worked by /.
Note that if he earns 3 less and she earns 3 more, the budget constraint does not change.
*
4 "! #! = ') + (-' ℎ' − 3) + (-( ℎ( − 3) = ') + -' ℎ' + -( ℎ(
!+'
Thus, if the model of choice does not allow for the different role of incomes for different
people, then there must be income pooling, implying that the standard budget constraint
model imposes income pooling by definition; hence being useless to depict such choices.
This occurs because the quantities demanded in this standard demand system model
are functions of the arguments of the problem.
#! = #! ("' , "( , ') = #! ("' , "( , '' + '( )
Thus, one more £ to her must have the same effect on spending as one more £ to him.
"! = "! ("' , "( , ') 89: "! = "! ("' , "( , '' + '( )
This contrast this with a more specified demand system model where we define incomes
of the household as different variables: #! = #! ("' , "( , '' , '( ) and "! = "! ("' , "( , '' , '( ),
And so, if there is income pooling then, keeping other factors constant,
;#! ;"!
=
;'' ;'(
In conclusion,
Standard Model (#! = #! ("' , "( , ') and "! = "! ("' , "( , ')):
Income Pooling by default (forced income pooling)
New Model (#! = #! ("' , "( , '' , '( ) and "! = "! ("' , "( , '' , '( )):
No Income Pooling by default (can choose to have or not have income pooling)
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, ECON0115 – Topics in Household Economics Rodrigo Antón García
o Topic 1.3 – Analzying Data.
Microeconomic data are large sets of quantified information regarding individual units of
observations, their environment and some or many outcomes of interest.
Units of observations can be individuals, households, firms or elements within
organisations or other entities.
Variations in data on individual agents arise because of differences in preferences, in
characteristics, in environment, and because of random shocks and measurement error.
Microeconomic data can be cross-sectional data, pooled-cross sectional data (repeated
cross-sectional data) or panel (longitudinal data). Note there is also time series data.
- Cross-Sectional Data.
A cross-sectional data set consists of a sample of individuals, households, firms, cities,
states, countries, or a variety of other units of interest, taken at a given point in time.
These data are good for investigating relationships between variables which vary across
in units at a given point in time (incomes, commodity demands).
Each unit is observed once, the data refers to one time period.
Household budget surveys, which record purchases made by households as well as their
incomes and their characteristics (e.g., household size, region of residence) are cross-
section data. The Census is another example of cross-section data.
Cross section data are used to investigate relationships between variables that vary
widely across individuals at any point in time such as income and commodity demand.
But may lack variation in other variables i.e., prices.
In the matter of household economics, it could be useful to test income pooling through
a simple regression and then analysing the marginal effects of the income of each
household integrant. However, in many cases we run into endogeneity problems.
This is because the choices they make in term of income can be correlated with the
choices they make in terms of the good being student, and as such, we could have a
bias in such coefficients if we were taking income as exogeneous when it is not in reality.
- Repeated Cross-Sectional Data (Pooled Cross-Sectional Data).
A pooled cross section data set combines two or more cross sections in one data set; it
has both cross-sectional and time series features. Here, cross sections are drawn
independently of each other. These data are good for analysing the effects of a new
government policy by collecting data from the years before and after a key policy change
Each unit is observed once, but it is repeated at different points in time.
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