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Relational Contracts, Taxation and the Household

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  • Apps, Patricia

    ()
    (University of Sydney)

  • Rees, Ray

    ()
    (University of Munich)

Abstract

This paper applies the theory of relational contracts to make precise the idea that because households are engaged in a repeated non-cooperative game, Pareto efficient outcomes can be supported by self interest, given the specific pattern of specialisation and exchange which exists in the household. The household's choice of a particular solution from the resulting feasible set is found by the maximisation of a household welfare function, a generalisation of a suggestion originally made by Samuelson. This nests as special cases the objective functions used in currently popular models of households engaged in one-shot cooperative games. We take a specific example of such a household welfare function, characterise the determinants of the household utility distribution, and then apply the model to examine the effects of a move from joint to individual taxation. We show that on standard stylised facts, secondary earners are always better off absolutely, and define the conditions under which they will also be so relatively. This confirms the conclusions from models which concern themselves only with the across-household welfare distribution.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4189.

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Length: 15 pages
Date of creation: May 2009
Date of revision:
Publication status: published in: CESifo Economic Studies, 2011, 57 (2), 245-258
Handle: RePEc:iza:izadps:dp4189

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Keywords: welfare distribution; taxation; allocations; households; relational contracts;

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References

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  1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 93(3), pages 835-857, June.
  2. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, Elsevier, vol. 39(1), pages 191-225, June.
  3. MacLeod, W Bentley & Malcomson, James M, 1998. "Motivation and Markets," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 388-411, June.
  4. Martin Browning & Pierre-Andre Chiappori, 1994. "Efficient Intra-Household Allocations: a General Characterization and Empirical Tests," Department of Economics Working Papers 1994-02, McMaster University.
  5. Lundberg, S. & Pollak, R.A., 1991. "Separate Spheres Bargaining and the Marriage Market," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 91-08, Department of Economics at the University of Washington.
  6. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 447-80, March.
  7. Apps,Patricia & Rees,Ray, 2009. "Public Economics and the Household," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521887878.
  8. McElroy, Marjorie B & Horney, Mary Jean, 1981. "Nash-Bargained Household Decisions: Toward a Generalization of the Theory of Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(2), pages 333-49, June.
  9. Shelly Lundberg & Robert A. Pollak, 2001. "Efficiency in Marriage," NBER Working Papers 8642, National Bureau of Economic Research, Inc.
  10. Chen, Zhiqi & Woolley, Frances, 2001. "A Cournot-Nash Model of Family Decision Making," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(474), pages 722-48, October.
  11. Alesina, Alberto & Ichino, Andrea & Karabarbounis, Loukas, 2007. "Gender Based Taxation and the Division of Family Chores," IZA Discussion Papers 3233, Institute for the Study of Labor (IZA).
  12. Apps, Patricia & Rees, Ray, 2007. "The Taxation of Couples," IZA Discussion Papers 2910, Institute for the Study of Labor (IZA).
  13. Pollak, Robert A, 1985. "A Transaction Cost Approach to Families and Households," Journal of Economic Literature, American Economic Association, vol. 23(2), pages 581-608, June.
  14. Apps, Patricia & Long, Ngo Van & Rees, Ray, 2011. "Optimal Piecewise Linear Income Taxation," IZA Discussion Papers 6007, Institute for the Study of Labor (IZA).
  15. Apps, Patricia & Rees, Ray, 1999. "On the taxation of trade within and between households," Journal of Public Economics, Elsevier, Elsevier, vol. 73(2), pages 241-263, August.
  16. Manser, Marilyn & Brown, Murray, 1980. "Marriage and Household Decision-Making: A Bargaining Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 31-44, February.
  17. Apps, Patricia F. & Rees, Ray, 1988. "Taxation and the household," Journal of Public Economics, Elsevier, Elsevier, vol. 35(3), pages 355-369, April.
  18. Rees, Ray, 1988. "Taxation and the Household," Munich Reprints in Economics, University of Munich, Department of Economics 3411, University of Munich, Department of Economics.
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Cited by:
  1. Meier, Volker & Rainer, Helmut, 2011. "On the Optimality of Joint Taxation for Non-Cooperative Couples," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48696, Verein für Socialpolitik / German Economic Association.

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