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Does the Representation of Household Behavior Matter for Welfare Analysis of Tax-benefit Policies? An Introduction

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Abstract

A widely shared intuition holds that individual control over money matters for the decision process within the household and the subsequent distribution of resources and welfare. As a consequence, there are good reasons to depart from the unitary model of the household and to explore the possibilities offered by models of the family accounting for several decision makers in the household and for the potential impact of tax reforms on the balance of power. This paper summarizes both the methodological and empirical findings presented in the next three papers of this special issue of the Review of the Economics of the Household. This series of contributions primarily entails a concrete comparison of the policy implications of the choice between the unitary and a particular multi-person representation: the collective representation. On the one hand, it suggests a methodology to implement the collective model of labor supply in a realistic context where participation is modeled together with working hours, and where the full tax-benefit system is accounted for. On the other hand, the empirical part relies on comprehensive simulations of tax reforms in Belgium, France, Germany, Italy, Spain, and the United Kingdom, and allows to quantify the distortions that may affect policy recommendations based on the unitary model.

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Notes

  1. The share of individual income in total household unearned income usually has a significant impact on household decisions. See, among others, Behrman (1988), Thomas (1990, 1992), Schultz (1990) or Lechene and Attanasio (2002). The well-known evidence of Lundberg, Pollak and Wales (1997) also shows that a ‘wallet to purse’ reform in the UK in the 1970s has significantly affected consumption patterns.

  2. Since these early models still respect symmetry and negative semi-definiteness of the Slutsky matrix, they are usually classified as unitary models.

  3. See, e.g., Leuthold (1968), Ashworth and Ulph (1981), Bourguignon (1984) or Chen and Woolley (2001). See Donni (2006) for an extensive review of non-cooperative models and their properties.

  4. Lundberg and Pollak (2003) have shown, however, that if current decisions affect spouses’ future bargaining power, then inefficient outcomes are possible. See also Lundberg and Pollak (1994), Ott (1992) and Donni (2006) for discussions.

  5. See, e.g., Fortin and Lacroix (1997), Browning and Chiappori (1998), Chiappori, Fortin, and Lacroix (2002), and Vermeulen (2005).

  6. Strictly speaking, this statement applies to a nonparametric version of the model. In practice, a rather restrictive functional form is often used and adds (possibly undesirable) constraints on the form of the underlying negotiation process.

  7. See theoretical contributions by Apps and Rees (1997), Chiappori (1997) and Rapoport, Sofer, and Solaz (2003) on domestic production, and Bourguignon (1999) and Blundell, Chiappori, and Meghir (2005) on the presence of children. See also some estimations by Chiuri (1999), Couprie (2003), Rapoport, Sofer, and Solaz (2003, 2006) and Bourguignon and Chiuri (2005), and an important generalization in Donni (2005).

  8. In Moreau and Donni (2002), for instance, male and female labor supplies were estimated on two-earner couples, ignoring participation decisions and convexifying the budget set.

  9. This case is nonetheless interesting since it allows to study the impact of policies which affect individuals in case of divorce. For instance, social benefits targeted to single mothers, such as the Aid to Families with Dependent Children (AFDC) in the US, may affect fall-back options of married women with children and the probability of divorce. As a matter of fact, Rubalcava and Thomas (2000) find that variations in AFDC levels over time and across US states directly affect the bargaining position of married mothers with low incomes, and subsequently household decisions on consumption and time allocation. In the spirit of the present project, Bargain and Moreau (2005) simulate a Nash bargaining model with divorce threat points in order to investigate the incidence of such reforms.

  10. One could argue that relevant threat points depend ultimately on empirical evidence. Some studies emphasize both the role of divorce (and related marriage market issues)—see Gray (1998), Chiappori et al. (2002), Moreau and Donni (2002), Grossbard-Shechtman and Neuman (2003), and Wolfers (2005) among others—and the possible role of non-cooperative situations on intrahousehold decisions. Bergstrom (1996) reconciles both approaches in a model drawing on noncooperative foundations of bargaining models (à la Rubinstein-Binmore), where noncooperation is an intermediary threat and divorce is the ultimate threat.

  11. A possibility, however, is to suggest that non-convex parts of the utility set are not attained by households when they are assumed to play mixed strategies. In this case, it is possible to model household decisions as the maximization of a household welfare function; see Bargain and Moreau (2002). Tax policy analysis is performed by Vermeulen (2004) using an estimation of a collective model of female labor supply. Both papers still rely on estimations on single individuals to complete identification.

  12. This approach relies implicitly on cardinality assumptions. As suggested by Van Praag (1994), this branch of research should ultimately resort to richer data than those which can be derived from the observation of demand behavior.

  13. Complete results for each country and a number of different tax reforms are available in Vermeulen (2002b, Belgium), Bargain, Beninger, Laisney, and Moreau (2002, France), Beninger, Beblo, and Laisney (2002, Germany), Chiuri and Longobardi (2002, Italy), Carrasco and Ruiz-Castillo (2002, Spain), and Blundell, Lechene, and Myck (2002, UK).

  14. This strategy originates from Beninger and Laisney (2002) who present insights on the basis of purely synthetic data. The present project extends their work to real data.

  15. On the importance of properly identifying pure leisure, see e.g. Apps (2003).

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Acknowledgements

This paper exploits work done in the one-year project “Welfare analysis of fiscal and social security reforms in Europe: does the representation of family decision processes matter?” , partly financed by the EU, General Directorate Employment and Social Affairs, under grant VS/2000/0778. We are grateful for comments and advice from the Editors, anonymous referees, François Bourguignon, Martin Browning, Pierre-André Chiappori, Olivier Donni, Andreas Krüpe, Jason Lee, Ernesto Longobardi, Isabelle Maret, Costas Meghir, Nathalie Picard, Hubert Stahn, Ian Walker and Bernarda Zamora, as well as participants in conferences and seminars too numerous to be quoted here. The usual disclaimer applies.

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Authors and Affiliations

  1. IZA, Bonn, Germany

    Olivier Bargain

  2. CHILD, Turin, Italy

    Olivier Bargain & Maria-Concetta Chiuri

  3. ZEW, Mannheim, Germany

    Miriam Beblo, Denis Beninger & François Laisney

  4. IFS, London, UK

    Richard Blundell, Valérie Lechene & Michal Myck

  5. UCL, London, UK

    Richard Blundell

  6. Universidad Carlos III, Madrid, Spain

    Raquel Carrasco & Javier Ruiz-Castillo

  7. Universitá di Bari, Bari, Italy

    Maria-Concetta Chiuri

  8. BETA-Theme, ULP, Strasbourg, France

    François Laisney

  9. Wadham College, Oxford, England

    Valérie Lechene

  10. GREMAQ and LIRHE, Toulouse, France

    Nicolas Moreau

  11. DIW, Berlin, Germany

    Michal Myck

  12. Tilburg University, Tilburg, Netherlands

    Frederic Vermeulen

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Bargain, O., Beblo, M., Beninger, D. et al. Does the Representation of Household Behavior Matter for Welfare Analysis of Tax-benefit Policies? An Introduction. Rev Econ Household 4, 99–111 (2006). https://doi.org/10.1007/s11150-006-0001-8

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