Fast Solution of Dynamic Intra-Household Bargaining Models

Dynamic household bargaining models are growing in popularity but are computationally demanding to solve and estimate. We propose a modification to the endogenous grid method (EGM) that allows this class of models to reap the benefits of the EGM. The method, which we refer to as interpolated EGM (iEGM), precomputes optimal intertemporal consumption as a function of the expected marginal value of wealth before solving the dynamic bargaining model. We illustrate the implementation of the iEGM in a simple example, where the iEGM is around 20 times faster than standard value function iterations. In a more complex quantitative model it is about 50 times faster, without compromising accuracy. We apply the iEGM to a rich household model to study how productivity shocks affect consumption inequality. Our results suggest that the degree of commitment of household members can affect the consequences of individual labor productivity shocks, such as e.g. skill-biased technological change.