General Equilibrium with Variable Household Structure

Abstract

We are mainly interested in the efficiency properties and in the decentralization possibilities of the dual allocation mechanism consisting of collective household decisions and the competitive exchange of commodities. Variable household structures allow flexible boundaries between collective decisions and markets for the allocation of commodities. We find that a social planner can decentralize a Pareto optimal allocation as a competitive equilibrium among households by rearranging households and by lump-sum redistributions of endowments. The social planner faces, however, the requirement that households conform with his intentions when making their collective decisions.

• We deal with the validity and failure of variations of the first welfare theorem when the household structure is variable.

• We establish a version of the second welfare theorem.

• The social planner has to rearrange households and redistribute endowments, and must rely on households taking the envisioned collective decisions.