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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 & 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.
  2. Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frederic Vemeulen, 2008. "Nonparametric tests of collectively rational consumption behavior: an integer programming procedure," Center for Economic Studies - Discussion papers ces0801, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  3. Martin Browning & Thomas F. Crossley, 2000. "The Life Cycle Model of Consumption and Saving," Social and Economic Dimensions of an Aging Population Research Papers 28, McMaster University.
  4. Rees, Ray, 1988. "Taxation and the Household," Munich Reprints in Economics 3411, University of Munich, Department of Economics.
  5. 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.
  6. 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.
  7. Richard Blundell & Martin Browning & Ian Crawford, 2008. "Best Nonparametric Bounds on Demand Responses," Econometrica, Econometric Society, vol. 76(6), pages 1227-1262, November.
  8. Chiappori, P.A. & Ekeland, I., 2006. "The micro economics of group behavior: General characterization," Journal of Economic Theory, Elsevier, vol. 130(1), pages 1-26, September.
  9. Laurens Cherchye & Frederic Vermeulen, 2003. "Nonparametric Analysis of Household Labour Supply: Goodness-of-Fit and Power of the Unitary and the Collective Model," Public Economics Working Paper Series ces0302, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  10. Cherchye, Laurens & De Rock, Bram & Vermeulen, Frederic, 2010. "Married with Children: A Collective Labor Supply Model with Detailed Time Use and Intrahousehold Expenditure Information," IZA Discussion Papers 5190, Institute for the Study of Labor (IZA).
  11. Maurizio Mazzocco, 2007. "Household Intertemporal Behaviour: A Collective Characterization and a Test of Commitment," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 857-895.
  12. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
  13. Fortin, Bernard & Lacroix, Guy, 1997. "A Test of the Unitary and Collective Models of Household Labour Supply," Economic Journal, Royal Economic Society, vol. 107(443), pages 933-55, July.
  14. Duncan Thomas, 1990. "Intra-Household Resource Allocation: An Inferential Approach," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 635-664.
  15. Chiappori, Pierre-Andre, 1992. "Collective Labor Supply and Welfare," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 437-67, June.
  16. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
  17. Guy Lacroix & Natalia Radtchenko, 2008. "The Changing Intra-Household Resource Allocation in Russia," Cahiers de recherche 0811, CIRPEE.
  18. Tim Beatty & Ian Crawford, 2010. "How demanding is the revealed preference approach to demand," CeMMAP working papers CWP17/10, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  19. Richard Blundell & Martin Browning & Ian Crawford, 1997. "Non-parametric Engel curves and revealed preferences," IFS Working Papers W97/14, Institute for Fiscal Studies.
  20. 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, vol. 30(4), pages 979-92, November.
  21. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  22. Diewert, W E, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 419-25, July.
  23. 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.
  24. Lundberg, Shelly J, 1988. "Labor Supply of Husbands and Wives: A Simultaneous Equations Approach," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 224-35, May.
  25. Apps, Patricia F. & Rees, Ray, 1988. "Taxation and the household," Journal of Public Economics, Elsevier, vol. 35(3), pages 355-369, April.
  26. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2011. "The revealed preference approach to collective consumption behavior: nonparametric testing and sharing rule recovery," ULB Institutional Repository 2013/98560, ULB -- Universite Libre de Bruxelles.
  27. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
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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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