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Commitment in intertemporal household consumption: a revealed preference analysis

  • Laurens CHERCHYE
  • Bram DE ROCK
  • Jeroen SABBE
  • Ewout VERRIEST

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-verifiable) specification 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-specific commitment patterns. Importantly, our application also shows that bringing intertemporal dynamics in the empirical analysis can substantially increases the discriminatory power of the revealed preference methodology.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces10.33.

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Date of creation: Dec 2010
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Handle: RePEc:ete:ceswps:ces10.33
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  1. Browning, Martin & Francois Bourguignon & Pierre-Andre Chiappori & Valerie Lechene, 1994. "Income and Outcomes: A Structural Model of Intrahousehold Allocation," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1067-96, December.
  2. Diewert, W E, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 419-25, July.
  3. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2012. "Married with Children: A Collective Labor Supply Model with Detailed Time Use and Intrahousehold Expenditure Information," American Economic Review, American Economic Association, vol. 102(7), pages 3377-3405, December.
  4. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
  5. Richard Blundell & Martin Browning & Ian Crawford, 2005. "Best nonparametric bounds on demand responses," IFS Working Papers W05/20, Institute for Fiscal Studies.
  6. 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.
  7. 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.
  8. Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frederic Vermeulen, 2008. "Nonparametric tests of collectively rational consumption behavior: an integer programming procedure," ULB Institutional Repository 2013/131712, ULB -- Universite Libre de Bruxelles.
  9. Duncan Thomas, 1990. "Intra-Household Resource Allocation: An Inferential Approach," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 635-664.
  10. M. Browning & P. A. Chiappori, 1998. "Efficient Intra-Household Allocations: A General Characterization and Empirical Tests," Econometrica, Econometric Society, vol. 66(6), pages 1241-1278, November.
  11. Chiappori, Pierre-Andre, 1992. "Collective Labor Supply and Welfare," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 437-67, June.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. Richard W. Blundell & Martin Browning & Ian A. Crawford, 2003. "Nonparametric Engel Curves and Revealed Preference," Econometrica, Econometric Society, vol. 71(1), pages 205-240, January.
  17. Guy Lacroix & Natalia Radtchenko, 2008. "The Changing Intra-Household Resource Allocation in Russia," Cahiers de recherche 0811, CIRPEE.
  18. 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.
  19. 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.
  20. Apps, Patricia F. & Rees, Ray, 1988. "Taxation and the household," Journal of Public Economics, Elsevier, vol. 35(3), pages 355-369, April.
  21. 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.
  22. 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.
  23. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
  24. 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.
  25. Rees, Ray, 1988. "Taxation and the Household," Munich Reprints in Economics 3411, University of Munich, Department of Economics.
  26. 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.
  27. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
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