ISBN-10:
0691096678
ISBN-13:
9780691096674
Pub. Date:
04/14/2003
Publisher:
Princeton University Press
An Economic Analysis of the Family / Edition 1

An Economic Analysis of the Family / Edition 1

by John F. Ermisch, John Ermisch

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ISBN-13: 9780691096674
Publisher: Princeton University Press
Publication date: 04/14/2003
Edition description: New Edition
Pages: 224
Product dimensions: 9.30(w) x 6.20(h) x 1.20(d)

About the Author

John F. Ermisch is Professor of Economics at the Institute for Social and Economic Research of the University of Essex and a Fellow of the British Academy. He is the author of Lone Parenthood: An Economic Analysis and The Political Economy of Demographic Change.

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An Economic Analysis of the Family


By John F. Ermisch

Princeton University Press

John F. Ermisch
All right reserved.

ISBN: 0691096678


Chapter One

INTRODUCTION

THE FAMILY has been undergoing dramatic changes during recent years. In richer countries, marriage and childbearing are occurring much later in people's lives, and they are having fewer children. There is more child-bearing outside marriage, more divorce and more one parent families. In some poorer countries, fertility has fallen sharply, while in others there has been little change. Associated with these developments, there have been changes in the ways in which family members interact with one another, including support for elderly parents or children (e.g. payments after divorce), and with markets.

The analysis in this book aims to improve our understanding of how families and markets interact, why important aspects of families have been changing in recent decades and how public policy affects them. It is built on the idea that the standard analytical methods of microeconomics, including the techniques of constrained optimization, can help us to understand resource allocation and the distribution of welfare within the family, intergenerational transfers and transmission, family formation and dissolution and household formation. It also aims to show how economic theories of the family can help to guide and structure empirical analyses of demographic and related phenomena(e.g. labour supply and child support).

The book is intended for research students, social scientists and policy makers who wish to learn how economists analyse family issues. The analysis is relevant to family behaviour in rich and poor countries. Examples of studies that apply the theory are provided throughout the book. This chapter outlines the main arguments of the book.

1.1 INTRA-HOUSEHOLD ALLOCATION

Analysis of the impact of many public policies and technological developments on the welfare of individuals requires that we take seriously the view that individualism is the foundation of microeconomic theory. The family is an important institution in the determination of an individual's welfare, and so we must try to understand behaviour within the family in order to assess the welfare consequences of policies and social developments. The analysis allows for individuals within a family to have different preferences.

When putting a social institution like the family under analytical scrutiny, it is helpful to assume that individuals understand their environment and act rationally to maximize their own welfare. This does not mean that people are perfect in these respects, but to focus on analysis of the institution, we abstract from idiosyncratic aspects of individual behaviour. A fruitful starting point is to assume that people act to maximize their welfare as they evaluate it, given the predicted behaviour of others. It provides a foundation for modelling cooperative behaviour within a family. Family members must obtain welfare from cooperation that is at least as high as they would achieve from this non-cooperative outcome.

Chapter 2 focuses on the behaviour of couples with children. Decisions about when to have children and how many to have are considered later. Benefits from expenditure on children are assumed to be a "public good" for the parents, in the sense that an individual parent's welfare from total expenditures on children is not affected by the presence of the other parent. Suppose initially that the parents do not cooperate in making decisions in the sense that each parent chooses his(her) contribution to child expenditures to maximize his(her) welfare, taking the contribution of their partner as given. There are two types of outcome from this behaviour. When one parent's share of total income is not "sufficiently different" from the other's, both contribute to child expenditures, and only joint family income matters for expenditures on children and each parent's expenditure on him(her)self. How much is "sufficiently different" depends on each parent's preferences. If, however, one parent has a relatively small share of family income, then that parent will not contribute to child expenditures. In contrast to the first type of outcome, redistribution of income between parents affects expenditures on children, private expenditure and individual welfare.

The non-cooperative outcome is inefficient (i.e. one parent could be made better off while not making the other worse off), because it encourages "free riding" on the other parent. The best strategy for one parent is to reduce his(her) contribution to expenditure on children when the other parent increases hers(his), and this usually produces too little expenditure on children relative to the efficient level. This non-cooperative model can indicate what the "fallback position" would be if communication and bargaining within the family break down, and how individual preferences and incomes affect this fallback position.

Cooperation between parents is usually a better representation of family behaviour. It achieves an efficient allocation between parents' private consumption and child expenditure. For the types of individual preferences usually assumed in economic analysis, the outcome is equivalent to giving each parent a share of joint family income and letting each choose his(her) consumption and his(her) contribution to child expenditure according to his(her) own preferences. In other words, it is like there is an income sharing rule, which in general depends on individual incomes and prices and possibly other factors such as marriage market conditions and divorce laws. One interpretation of it is that it reflects bargaining within the family.

Each parent has the alternative of not cooperating, providing an alternative level of welfare, which is called their threat point. Corresponding to these threat points are minimum and maximum shares of income allocated to the mother in the cooperative outcome. Individual incomes can affect the cooperative outcome by affecting these threat points. One possible bargaining rule is to maximize the welfare of a "dominant partner". For example, if the husband were dominant, he would offer his wife just enough to accept this arrangement, which would be her threat point. Another rule is so-called "Nash bargaining", which maximizes the product of the parents' gains from cooperation (i.e. welfare in the cooperative outcome minus the threat point).

There are two prime candidates for the threat points: welfare if the parents divorce and welfare from a non-cooperative marriage, considered above. It is shown in Chapter 2 that divorce is often not a credible threat, even when welfare in the divorced state exceeds that from a non-cooperative marriage for both partners. This is because bargaining based on the threat points from a non-cooperative marriage produces a better welfare outcome for both parents than divorce. In this case, small changes in the welfare if divorced, say because of changes in welfare benefits to divorced mothers, have no impact on the cooperative outcome from bargaining. There are, however, situations when divorce is a credible threat, but then the outcome is not the one produced by Nash bargaining with the welfare if divorced as the threat points, but rather one partner is indifferent between divorce and marriage. In this case, the opportunities available to each parent if the relationship dissolved would affect allocation and distribution when the couple are together.

Bargaining within the family makes it possible that, for example, an increase in the mother's income has two effects. It increases family income, which increases expenditure on children and herself. It also may increase the bargaining power of the mother, which could reinforce or offset the income effects, depending on each parent's preferences for child expenditure. If, as many believe, mothers' preferences put more weight on children than fathers' preferences do, then an increase in her bargaining power would also increase expenditure on children. But note that if the threat points are determined by the outcome of a non-cooperative marriage in which both parents contribute to expenditure on children, then an increase in the mother's income would not affect her threat point or her bargaining power.

Traditional consumer theory usually assumes that the household behaves "as if" it is a single agent, allowing an application of the tools of consumer theory at the household level. This assumption, which is often called the "unitary model", or "consensus model", amounts to assuming that the income sharing rule does not vary with individual incomes. Thus, one important implication of it is that expenditure on children and each parent's private consumption depend only on total family income-the so-called "income pooling" hypothesis. Suppose, for example, that we were comparing two possible cash transfer policies, one which paid the transfer to the mother and the other which paid it to the father. Under the unitary model, expenditure patterns would be invariant to the policy chosen. When the sharing rule is affected by individual incomes, expenditures on children and private expenditure would depend on who received the transfer. An important real-world example of such a policy change in the United Kingdom during the late 1970s soundly rejects the unitary model, as do many other studies. This suggests that children do better when mothers control more of the family resources, that developments which improve women's earning opportunities affect the distribution of welfare within families and that it is possible to target policies on individuals within families.

1.2 ALTRUISM IN THE FAMILY

In economic analysis, a person is said to be altruistic toward someone if his(her) welfare depends on the welfare of that person. Altruism, or "caring", is usually defined such that the altruist's welfare depends on the "private utilities" of the altruist and his(her) beneficiary, each of which represents their "private preferences" defined over the person's private consumption and consumption of public goods, such as child expenditures. That is, the altruist's welfare does not depend on how the beneficiary's welfare is obtained. Chapter 3 focuses on the implications of a family decision making rule that maximizes an effective altruist's welfare. An altruist is effective if he(she) makes financial transfers to his(her) beneficiary, and this happens when he(she) is sufficiently rich relative to his(her) beneficiary.

Maximizing the welfare of an effective altruist has some important implications. First, redistribution of income between the altruist and his(her) beneficiary has no effect on outcomes, provided that he(she) remains an effective altruist. Shifting income from him(her) to his(her) beneficiary would produce an offsetting reduction in transfers to him(her). This means that the income sharing rule is independent of individual incomes.

Altruistic behaviour also provides partial insurance. Suppose that the beneficiary lost his(her) job, causing a fall in his(her) income. Both parties would suffer a decline in welfare, but part of his(her) welfare loss would be offset by higher transfers from the altruist. For the same reason, it also partially insulates them from targeted changes in taxes and benefits.

If private preferences take a particular form, effective altruism also has powerful effects on incentives. A selfish beneficiary has the incentive to choose the efficient level of a public good consumed by both, or alternatively is perfectly content to let the altruist choose it, even though their preferences differ. More generally, both parties would take actions that raise their joint income and avoid actions that lower it. This is what Gary Becker has called the "Rotten Kid Theorem". But the existence of altruistic preferences per se does not eliminate conflict and generate efficient outcomes. When individual incomes are similar, an effective altruist may not emerge.

Unfortunately, it is not difficult to find preferences for which even effective altruism does not automatically align the interest of the beneficiary with those of the altruist, in contrast to what the Rotten Kid Theorem would suggest. Except for a very special case of altruistic preferences, a necessary condition for such conflict to be avoided is that private preferences take a particular form analysed in Chapter 3.

The Rotten Kid Theorem suggests that parents should delay transfers to their children until late in their lifetime or indeed until after their death, because this provides children with a long-run incentive to consider the interests of the entire family and maximize joint family income. Thus, it suggests that altruistic parents should use bequests rather than gifts. But if beneficiaries suffer disutility of effort in earning their income, bequests discourage effort by the child, because effort is costly and parents compensate for exerting less effort through larger bequests. Because bequests are inefficient, the Rotten Kid Theorem does not hold. Gifts (pre-committed fixed transfers) are preferable in the sense that they are efficient for the family because they only have an income effect. The child is worse off than if he(she) received bequests, because he(she) could work less and obtain higher transfers with bequests, but the parents are better off.

This is an example of the general phenomenon called the "Samaritan's dilemma." It arises when a benefactor's generosity encourages beneficiaries to be less self-sufficient. In the context of saving decisions, parents' bequests to their child encourage him(her) to over-consume early in life in order to be more impoverished and receive larger bequests later. He(she) does, however, have an incentive to maximize joint family income with bequests. If the parents pre-commit to gifts, he(she) allocates his(her) lifetime income efficiently between periods, but once he(she) has received the gift, he(she) would wish to take actions that maximize his(her) own income, even if it reduced joint family income. Thus, bequests would produce an inefficient outcome because of the Samaritan's dilemma, while gifts would be inefficient because of the failure of the Rotten Kid Theorem. Even effective altruism fails to produce efficient outcomes in this situation, irrespective of whether transfers are given "early" or "late".

1.3 HOME PRODUCTION AND INVESTMENT

Many goods important to the family, such as investment in children, are "produced" by the family themselves through the combination of parents' time and purchased goods and services. To take a trivial example, the production of meals and the nutrition of family members require someone's time and food purchased on the market. The division of parents' labour and the implications for the costs of home-produced goods, such as the child's human capital, depend on these "home production" relationships. In many respects this is a straightforward application of production and cost analysis from the theory of the firm, but it is helpful to put it in the family context.

Continues...


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Table of Contents

Prefaceix
Chapter 1Introduction1
Chapter 2Conflict and Cooperation in the Family: Intra-Household Allocation21
Chapter 3Altruism in the Family51
Chapter 4Home Production and Investment74
Chapter 5Investments in and Financial Transfers to Children86
Chapter 6Economic Theories of Fertility109
Chapter 7Matching in the Marriage Market137
Chapter 8When Forever Is No More: Divorce and Child Support169
Chapter 9Non-Altruistic Family Transfers195
Chapter 10Household Formation218
Chapter 11Social Interaction238
Bibliography255
Index263

What People are Saying About This

Behrman

Ermisch provides a well-written introduction to how economists analyze families that will be useful to students, economists and other social scientists, and policymakers. He devotes more attention than do previous books to interesting analysis of issues related to household formation and social context, and he more rigorously integrates recent developments, both theoretical and empirical, in this area of expanding scholarship.
Jere R. Behrman, University of Pennsylvania

Pierre Andre Chiappori

This is a good book, carefully written and a pleasure to read. It covers all aspects of family economics, with a particular emphasis on demographic issues, and conveys the main ideas of the existing literature in a clear, articulate, interesting manner. It should meet the needs of many students.
Pierre Andre Chiappori, University of Chicago

Alessandro Cigno

Well written and well organized, this book is particularly strong on issues relating to the intra-household allocation of resources—an area that has seen important research in recent years—and relations among members of non-intact families. It will be widely adopted as a very useful teaching text.
Alessandro Cigno, University of Florence

Recipe

"Ermisch provides a well-written introduction to how economists analyze families that will be useful to students, economists and other social scientists, and policymakers. He devotes more attention than do previous books to interesting analysis of issues related to household formation and social context, and he more rigorously integrates recent developments, both theoretical and empirical, in this area of expanding scholarship."—Jere R. Behrman, University of Pennsylvania

"This is a good book, carefully written and a pleasure to read. It covers all aspects of family economics, with a particular emphasis on demographic issues, and conveys the main ideas of the existing literature in a clear, articulate, interesting manner. It should meet the needs of many students."—Pierre André Chiappori, University of Chicago

"Well written and well organized, this book is particularly strong on issues relating to the intra-household allocation of resources—an area that has seen important research in recent years—and relations among members of non-intact families. It will be widely adopted as a very useful teaching text."—Alessandro Cigno, University of Florence

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