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Commitment in intertemporal household consumption: a revealed preference analysis

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Author Info

  • Jeroen Sabbe

    (K.U.Leuven Kulak)

  • Ewout Verriest

    (K.U.Leuven Kulak)

  • Bram De Rock

    (Université Libre de Bruxelles, K.U.Leuven Kulak)

  • Laurens Cherchye

    (K.U.Leuven Kulak, Universiteit van Tilburg)

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-veri fiable) specifi cation 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-specifi c commitment patterns. Importantly, our application also shows that bringing intertemporal dynamics in the empirical analysis can substantially increase the discriminatory power of the revealed preference methodology.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 251.

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Date of creation: 2011
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Handle: RePEc:red:sed011:251

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  1. Laurens Cherchye & Frederic Vermeulen, 2008. "Nonparametric Analysis of Household Labor Supply: Goodness of Fit and Power of the Unitary and the Collective Model," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 267-274, May.
  2. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2007. "The Collective Model of Household Consumption: A nonparametric characterization," ULB Institutional Repository 2013/98559, ULB -- Universite Libre de Bruxelles.
  3. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 56(1), pages 63-90, January.
  4. Cherchye, Laurens & De Rock, Bram & Sabbe, Jeroen & Vermeulen, Frederic, 2008. "Nonparametric tests of collectively rational consumption behavior: An integer programming procedure," Journal of Econometrics, Elsevier, Elsevier, vol. 147(2), pages 258-265, December.
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  7. Richard Blundell & Martin Browning & Ian Crawford, 1997. "Non-parametric Engel curves and revealed preferences," IFS Working Papers, Institute for Fiscal Studies W97/14, Institute for Fiscal Studies.
  8. Tim Beatty & Ian Crawford, 2010. "How demanding is the revealed preference approach to demand," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP17/10, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  9. Browning, Martin, 1989. "A Nonparametric Test of the Life-Cycle Rational Expectations Hypothesis," 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. 30(4), pages 979-92, November.
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  11. Laurens CHERCHYE & Bram DE ROCK & Frederic VERMEULEN, 2010. "Married with children: a collective labor supply model with detailed time use and intrahousehold expenditure information," Center for Economic Studies - Discussion papers, Katholieke Universiteit Leuven, Centrum voor Economische Studiën ces10.24, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  12. Cherchye, L.J.H. & Rock, B. de & Vermeulen, F.M.P., 2005. "Opening the Black Box of Intra-Household Decision-Making: Theory and Non-Parametric Empirical Tests of General Collective Consumption Models," Discussion Paper, Tilburg University, Center for Economic Research 2005-51, Tilburg University, Center for Economic Research.
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  22. 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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  25. Fortin, Bernard & Lacroix, Guy, 1997. "A Test of the Unitary and Collective Models of Household Labour Supply," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(443), pages 933-55, July.
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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, 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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