How Do Family Members Negotiate to Reach a Bargaining Agreement? A Study of Intrahousehold Behavior

We study intrahousehold behavior and investigate how family members negotiate to reach an agreement, recognizing that the negotiation process is relevant, though often costly. We focus not only on the efficient outcomes of the decision-making process, but also on the negotiation process. We propose an evolutionary bargaining approach that evaluates individual bargaining power as a function of the perceived cost of negotiation failure. The analysis extends the original Nash-Harsanyi cardinal representation to ordinal preferences and rationalizes agreements that may be inefficient. We show how bounded rationality generates a latent budget constraint that can be useful in modeling household behavior. The implications for efficiency and income distribution are discussed. We illustrate the usefulness of our theory in an empirical application.