Financial Management, Bargaining and Efficiency within the Household; an Empirical Analysis

Abstract

This paper analyzes data from the British Household Panel Survey on households' financial management and financial decision-making. Direct subjective information was collected by asking questions like ‘Who has the final say in big financial decisions?’. All questions were answered separately by both partners. We consider two competing models explaining how finances are organized. The first model is based on a household production approach, in which behaviour is determined by an efficient allocation of both partners' time to market work, financial management, and leisure. In the second model, which is game-theoretic in nature, financial management is a reflection of bargaining power. The two models have different implications for the effect of explanatory variables, in particular wages, on the dependent variables. Empirical results indicate that financial management is primarily determined by bargaining considerations.