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Relational Contracts, Taxation and the Household

  • Patricia Apps
  • Ray Rees

This article 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 specialization and exchange that exists in the household. The household's choice of a particular solution from the resulting feasible set is found by the maximization of a household welfare function, a generalization of a suggestion originally made by Samuelson.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, characterize 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 stylized facts, secondary earners are always better off absolutely, and define the conditions under which they will also be relatively better off. This confirms the conclusions from models that concern themselves only with the across-household welfare distribution. (JEL Codes: D11, D13, H21, H24, H31, J12, J16, K36, N30) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email:, Oxford University Press.

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Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 57 (2011)
Issue (Month): 2 (June)
Pages: 245-258

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Handle: RePEc:oup:cesifo:v:57:y:2011:i:2:p:245-258
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  1. 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.
  2. 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, vol. 22(2), pages 333-49, June.
  3. Patricia Apps & Ngo Van Long & Ray Rees, 2009. "Optimal Piecewise Linear Income Taxation," CESifo Working Paper Series 2565, CESifo Group Munich.
  4. Alesina, Alberto F & Ichino, Andrea & Karabarbounis, Loukas, 2007. "Gender Based Taxation and the Division of Family Chores," CEPR Discussion Papers 6591, C.E.P.R. Discussion Papers.
  5. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
  6. Lundberg, S. & Pollak, R.A., 1991. "Separate Spheres Bargaining and the Marriage Market," Working Papers 91-08, University of Washington, Department of Economics.
  7. MacLeod, W.B. & Malcomson, J.M., 1997. "Motivation and markets," Discussion Paper Series In Economics And Econometrics 9720, Economics Division, School of Social Sciences, University of Southampton.
  8. Patricia Apps & Ray Rees, 2007. "The Taxation of Couples," Discussion Papers 07/21, Department of Economics, University of York.
  9. 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.
  10. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  11. Zhiqi Chen & Frances Woolley, 1999. "A Cournot-Nash Model of Family Decision Making," Carleton Economic Papers 99-13, Carleton University, Department of Economics, revised Oct 2001.
  12. Apps, P.F. & Rees, R., 1998. "On the Taxation of Trade Within and Between Households," Papers 337, Australian National University - Department of Economics.
  13. Shelly Lundberg & Robert Pollak, 2003. "Efficiency in Marriage," Review of Economics of the Household, Springer, vol. 1(3), pages 153-167, September.
  14. repec:cup:cbooks:9780521887878 is not listed on IDEAS
  15. repec:cup:cbooks:9780521716284 is not listed on IDEAS
  16. Rees, Ray, 1988. "Taxation and the Household," Munich Reprints in Economics 3411, University of Munich, Department of Economics.
  17. Apps, Patricia F. & Rees, Ray, 1988. "Taxation and the household," Journal of Public Economics, Elsevier, vol. 35(3), pages 355-369, April.
  18. 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, vol. 21(1), pages 31-44, February.
  19. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
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