Development Economics: Intra-Household Decision Processes

Development Economics Topic: Intra-Household decision process/income allocation Individuals consume broadly 2 types of goods: Private goods: a single meal at restaurant, cigarettes, single movie ticket, etc… (benefit one individual) Public goods: housing, water/electricity/heating bi...

Development Economics Topic: Intra-Household decision process/income allocation Individuals consume broadly 2 types of goods: Private goods: a single meal at restaurant, cigarettes, single movie ticket, etc… (benefit one individual) Public goods: housing, water/electricity/heating bills, food and clothing for children, (benefit several or all members of the hh) Husbands and wives allocate their incomes on those 2 types of goods. 2  Does it make a difference if it is the husband or the wife who manages the hh income? Husband and wife may have different preferences… →implications on insurance; savings and which saving vehicle is used (later in course) →implications on micro-credit uptake (later in course) 3  In Africa the mechanics of a couple can vary considerably from: North or South of Saharan desert West / East and Central Africa Empirical evidence and field work for different developing countries in SSA are reviewed in: Deschenes, Dumas and Lambert (2020) 4  HH organisation (1) HHs can include several autonomous budgetary units Ind resources are not generally pooled; are not always known within the HH Social norms codify, in large part, who has access to which resources and who is responsible for catering to which needs in the HHs 5  HH organisation (2) Broad rule (SSAfrica): -women are in charge of catering to daily needs, require small expenses -husbands’ obligations include providing lodging and bearing the cost of health and education expenditures + infrequent but costly purchases (durable goods) 6  HH organisation (3) Husbands (in SSA) are viewed as breadwinners → does not prevent women from also working and earning some income Women keep part of this income for themselves. Separate budgets and secrecy between spouses are two rather general features of HHs, even in patrilineal societies. 7  HH organisation (4) Women often lack proper control over assets and inputs. → relative ownership of land by gender varies considerably in SSA → in agricultural context: women have control only over labour and sometimes over fertilizer and pesticides. 8  HH organisation (5) Structure of HHs and decision- making processes within them are influenced by: -absence of formal markets -absence of a public social protection system 9  Modelling HH decision making The next few slides present 3 main basic models used in Economics to depict HH interactions. 10 Model 1: Common preferences model (Unitary model) Max U i ( xi , K i ) s.t. : p x xi  pk K i I i I i I h  I w All individuals in the hh have same U function: possible to aggregate. Income is pooled (who earns the income has no importance) Share of income or individual wealth will not affect the allocations. 11 Model 2: Collective model (or cooperative model) It disaggregates the hh utility function based on a ‘decision Max iMax((γ). U rule’ U ( x , K )  (1   U ( x , Ki )) w w i h h s.t. : I i I w  I h  p x ( xw  xh )  pk ( K w  K h ) →Assumption: hh reaches a Pareto efficient outcome (no one could be made better off without making someone else worse off) and production on the frontier of possibility set 12 Model 3: Noncooperation models Income is not pooled Allows individuals to have different preferences Allows individuals to make consumption and production decisions based on their own resources. Draws on public goods literature of welfare economics (Paper on voluntary contributions in public good: Blume and Varian (1986) "On the Private Provision of Public Goods") Model determines how much each person spends on both public and private goods 13 Problem of private provision of Public good (similar set of equations for husbands): Max uw(xw , K) w.r.t. xw, kw s.t. xw + p kw = Iw and K= kw + kh Solutions (best-response functions): xw = fx(p , Iw , kh *) kw = fk(p , Iw , kh *) Expectations on kh can be based on past contributions Both Pareto efficient and non-Pareto efficient outcomes are consistent with this model. 14  WHICH MODEL FITS BETTER OBSERVATIONS? → What is there to test? 1)Are the allocations influenced by any bargaining power (who is the breadwinner inside the couple)? Is there an underlying sharing rule? 15 2) Are the allocations Pareto efficient? (no one can be made better off without making someone else worse off) Pareto efficient is not synonymous with a ‘desirable or preferred’ outcome from a policy or welfare perspective (a situation in which one hh member receives all of the resources could be Pareto efficient) 16  Pareto optimal or efficient: no change in the allocation of resources could lead to improved satisfaction for all parties. In a couple, if allocation of resources is not PO → a way to improve the satisfaction of one person without taking anything away from the other one. If not PO: some resources are wasted rather than being distributed within the couple. A reallocation of resources can ↓ this ‘‘waste” brings couple closer to PO. 17  marginal utility is being equated across all individuals: U h U  w x j x j A Pareto efficient outcome is consistent with all models BUT the collective model assumes that a Pareto efficient point is chosen. → a rejection of Pareto efficiency implies a rejection of the collective model. 18  Literature (related to dev. countries) Studies with hh consumption data have rejected the Unitary model in favor of Collective model: Thomas (1990) (Brazil); Hoddinot & Haddad (1995) (Ivory Coast); Quisumbing and Maluccio (2003) (Bangladesh, Ethiopia, Indonesia, South Africa) Studies on risk sharing rejecting the Collective model: Dercon & Krishnan (2000) (Ethiopia) Doss (2001) (Ghana); Duflo & Udry (2003) (Côte d’Ivoire) Studies on intra-household production decisions also tend to find less support for collective model Udry (1996) (Burkina Faso); McPeak and Doss (2006) (Kenya) 19  Review of evidence We present a review of some of the empirical studies testing whether one of these 3 models applies to a specific context. 20 Quisumbing & Malucio (2003) -Test of unitary model: Table 2, 3, 4 and 5 (overall results p.310) -Test of Pareto-efficiency: Table 7 Test if a constant ratio of income effects across all pairs of goods x j x j xv xv  I w I h I w I h Is marginal utility equal across all individuals? If not budget could be reallocated to ↑ utility of at least one person without ↓ anyone else’s 21 Udry (1996) : pp 1010-1024 A different efficiency test (Burkina Faso): →whether marginal productivity is being equated across all production activities “Within many African households, agricultural production occurs on many plots controlled by different members of the household. Pareto efficiency implies that factors should be allocated efficiently across these plots [...] plots controlled by women are farmed much less intensively than similar plots within the household controlled by men” Test of Pareto-efficiency: Table 3 22  Haider et al. (2018) confirm Udry’s results using data from Burkina Faso, 20 years later. Households do make an inefficient allocation of fertilizers: Common plots supervised by the household head receive far more than the other plots when controlling for their characteristics. 23 LeMay-Boucher & Dagnelie (2014) Informally questionned people in Cotonou about couple matters (money management): Interesting answers w.r.t money: ‘The less that he or she knows about my activities the better it is !!’ ‘I don’t want him/her to know my income otherwise he/she will ask me to meet the cost of such and such expenses.’ → Spouses seem overwhelmingly secretive → different from unitary and coop. model 24 Field evidence of intrahh behaviour Benin (576 ind. in couple surveyed): « Can you estimate your spouse revenus? » 79% no / 11% yes / 10% partially « Do you think your spouse can estimate your revenus? » 76% no / 16% yes / 8% partially → Intrahousehold secrecy → Evidence against commun budget 25 Related anthropological evidence (extra): Yoruba, Nigeria (Marshall 1964) “A woman’s income is kept separate from that of her husband, there is no commun budget(…)” Ewe, Ghana (Lawson 1972) “HH expenditure patterns demonstrate that the HH cannot be considered as a single unit (…)” (Hill 1975) “It is abundantly clear… that West African husbands and wives seldom form a unified production unit” Other works in West Africa: (Keita 1983), (Lecarme- Frassy 2000) and (Le Cour Grandmaison 1971): “women’s economic independence is a very wide spread custom in West-African societies.” Note: The references on this page are not listed are the end of this set of slides. 26 Concerning the Fon, Benin (Falen, 2011) “The principle economic rule for a married couple is that finances are separate. Marriage by no means entails a complete sharing of money, property or any other wealth. On the contrary, spouses rarely share access to each other’s money or belongings. The notion of a married couple’s communal property or joint bank accounts is totally foreign to most Fon people. Indeed, keeping common finances would be a dangerous proposition, since money is always scarce and people are generally willing to take, borrow, beg, or in any way extract money from another.” (p.164) 27  Separate but interacting Spheres Interaction among spouses for ki Provision of public good is done according to social norms and little coordination: Husband (breadwinner): house repair, rental fees, electricity, schooling fees, medical bills, extra money for housekeeping Wife: cooking, care of family, water Documented by: Falen (2003) + informal interviews + our descriptive stats 28  Based on field evidence collected at the individual level in Cotonou Benin (2004): 1) Provide evidence husband & wife are not pooling their income; 2) spouses individually allocate their income on private and public goods → See how independent spouses’ financial spheres are 29  Sample In Women in Men in Couple Couple Couple Monthly budget shares: mea mea mean se n se n se n=564 Food & non durable expenses 0.00 (gaz, transport, etc) 0.68 8 0.71 0.01 0.65 0.01 Personal expenditure (meals 0.00 0.03 0.00 0.04 0.00 out, cigarettes, alcool, etc) 0.04 1 6 2 4 2 Clothing 0.00 0.00 (for all members of hh) 0.05 2 0.06 4 0.05 0.0 0.00 0.00 0.00 Health 0.03 2 0.02 3 0.05 5 0.00 0.00 0.00 Schooling 0.03 3 0.01 2 0.05 4 → Mean total monthly expenditure: male = 98000 CFA / female = 55000 CFA Blue = significantly larger; Red = significantly smaller 30 → See Tables 3-6 in LeMay-Boucher & Dagnelie (2014) Most evidence of lack of communication and cooperation in the literature are from: --insurance based papers --hh decision making in production decisions 31 Using Experimental Economics Incentivised games in a controlled lab to test specific human behaviour -Isolates narrowly defined problems to be tested by well designed games -The lab creates an artificial environment (usually through anonymous interaction) that is less complicated by social interaction -Western university labs with student subjects versus ‘labs’ in developing countries with ‘real’ people -External validity – a challenge to experimental economics 32  Experiment : VCM We had: Unitary model / Collective / Non-coop model → Only Non-coop model does not guarantee an efficient outcome Can we test if spouses behave efficiently without looking at their actual expenditures or input allocations? Yes with an experiment 33  Many versions of a voluntary contribution mechanism (VCM): one to explore intra-hh efficiency and allocation with real spouses VCM: husbands and wives are given money to contribute to a common pool which is increased by a factor of X and divided between the two Treatments: -Differences in initial endowments -Information (public/private) →Kebede et al. (2013 and 2014) VCM in Ethiopia and India 34 35  Spouses don’t realise a significant proportion of potential surplus; assumption of efficiency is rejected contrary to most intra-household models Both male and female contribution rates increase (weakly) with public information (in some treatments) -the effect of information contextual? -affected by institutional arrangements? 36  Actual and expected contribution behaviour of spouses are sign different from each other -females contribute less than what their husbands expect -males contribute more than what their wives expect These systematic errors cast doubt on whether the expectations of spouses are aligned to attain maximising equilibrium 37  Half of the contribution rates of spouses are not statistically different from 50% -Simple rules of thumb may reflect underlying norms like fairness rather than maximising total surplus? Farmers contribute more (cooperation due to division of labour?) Most results contradict prediction of established cooperative intra-hh models 38  References Bergstrom, T., Blume L., H. Varian (1986) ‘On the private provision of public goods’ Journal of Public Economics, Volume 29, Issue 1, 25-49 Dercon S, Krishnan P. 2000. In Sickness and in health: risk sharing within households in rural Ethiopia. Journal of Political Economy 108: 688–727. Deschenes, S., Dumas, C. and S. Lambert (2020): "Household Resources and Individual Strategies", World Development, vol. 135, November. Doss C. 2001. Is risk fully pooled within the household? Evidence from Ghana. Economic Development and Cultural Change 50: 101–130. Duflo, E., & Udry, C. (2004). Intrahousehold Resource Allocation in Cote d’Ivoire: Social Norms, Separate Accounts and Consumption Choices. Working Paper 10498 National Bureau of Economic Research.https://doi.org/10.3386/w10498. URL: www.nber.org/papers/w10498. Falen, D. J. (2011). Power and Paradox: Authority, Insecurity, and Creativity in Fon Gender Relations. Trenton, NJ: Africa World Press. Kebede, B., Tarazona, M., Munro, A., & Verschoor, A. (2013). Intra-household efficiency: An experimental study from Ethiopia. Journal of African Economies, 23, 105–150. Munro, A., B. Kebede, M. Tarazona-Gomez, and A. Verschoor (2014) “Autonomy and Efficiency: An Experiment on Household Decisions in Two Regions of India,” Journal of the Japanese and International Economies, Vol. 33, pp. 114- 133. 39  Haider, H., Smale, M., & Theriault, V. (2018). Intensification and intrahousehold decisions: Fertilizer adoption in Burkina Faso. World Development, 105, 310–320. Hoddinott, J., & Haddad, L. (1995). Does Female Income Share Influence Household Expenditures? Evidence from Côte d’Ivoire. Oxford Bulletin of Economics and Statistics, 57, 77–96. LeMay-Boucher, P., & Dagnelie, O. (2014). The divorced financial spheres of Beninese spouses. Journal of International Development, 26, 46–58. McPeak, J. G., & Doss, C. R. (2006). Are household production decisions cooperative? Evidence on pastoral migration and milk sales from Northern Kenya. American Journal of Agricultural Economics, 88, 525–541. Thomas, D. (1990) Intra-Household Resource Allocation: An Inferential Approach’ The Journal of Human Resources , Vol. 25, No. 4, pp. 635-664 Quisumbing A, Maluccio J. 2003. Resources at marriage and intra- household allocation: evidence from Bangladesh, Ethiopia, Indonesia, and South Africa. Oxford Bulletin of Economics and Statistics 65: 283–327. Udry C. 1996. Gender, agricultural production, and the theory of the household. Journal of Political Economy 104: 1010–1046. 40