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Commitment in intertemporal household consumption: a revealed preference analysis

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  • Laurens CHERCHYE
  • Bram DE ROCK
  • Jeroen SABBE
  • Ewout VERRIEST

Abstract

We present a revealed preference methodology for analyzing intertemporal household consumption behavior. In doing so, we follow a collective approach, which explicitly recognizes that multi-member households consist of multiple decision makers with their own rational preferences. Following original work of Mazzocco (2007), we develop tests that can empirically verify whether observed consumption behavior is consistent with (varying degrees of) intrahousehold commitment. In our set-up, commitment means that households choose consumption allocations on the ex ante Pareto frontier. The distinguishing feature of our tests is that they are entirely nonparametric, i.e. their implementation does not require an a priori (typically non-verifiable) specification of the intrahousehold decision process (e.g. individual utilities). We demonstrate the practical usefulness of our methodology by means of an empirical application. For the data at hand, our results suggest using a so-called limited commitment model that allows for household-specific commitment patterns. Importantly, our application also shows that bringing intertemporal dynamics in the empirical analysis can substantially increases the discriminatory power of the revealed preference methodology.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces10.33.

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Date of creation: Dec 2010
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Handle: RePEc:ete:ceswps:ces10.33

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  1. Martin Browning & Thomas F. Crossley, 2001. "The lifecycle model of consumption and saving," IFS Working Papers W01/15, Institute for Fiscal Studies.
  2. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2009. "Opening the black box of intrahousehold decision making: theory and nonparametric empirical tests of general collective consumption models," ULB Institutional Repository 2013/98561, ULB -- Universite Libre de Bruxelles.
  3. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2007. "The Collective Model of Household Consumption: A Nonparametric Characterization," Econometrica, Econometric Society, vol. 75(2), pages 553-574, 03.
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  6. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2012. "Married with Children: A Collective Labor Supply Model with Detailed Time Use and Intrahousehold Expenditure Information," ULB Institutional Repository 2013/131705, ULB -- Universite Libre de Bruxelles.
  7. Laurens Cherchye & Thomas Demuynck & Bram De Rock, 2011. "Revealed preference analysis of noncooperative household consumption," ULB Institutional Repository 2013/131709, ULB -- Universite Libre de Bruxelles.
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Cited by:
  1. Thomas Demuynck & Ewout Verriest, 2013. "I’Ll Never Forget My First Cigarette: A Revealed Preference Analysis Of The “Habits As Durables” Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 717-738, 05.

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