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Standard microeconomic theory relies on two fundamental, separate agents the consumer and the producer. But households in developing countries are often consumers and producers of specific goods. This is especially true for staples (e.g., rice, maize, wheat). We focus on the agricultural household, which is both a production and a consumption unit. Well talk of agricultural household models (AHMs).
* x2
IC1 IC0
p1 / p2
* x1
Good 1
w/ p
F ( L* , E A )
L*
Labor
m p(c1 c2 ) wLh rA h pF ( L, A) w( L1 Lm ) rA m 2
Expenditures
f L L1f L2 Lh A A f Ah E A A f Am EiL Lif Lm i i ci , i , Lif , Lm , A f , Am 0 i
Income
Resource Constraints
The problem of the household is to maximize its utility subject to a budget constraint (expenditures cannot exceed income) and several resource constraints.
The above problem can be reduced by substituting the resource constraints into the budget constraint: this yields the following version of the households maximization problem.
ci , i , L, A 0
The new budget constraint is called the full-income constraint, and the next equation represents farm profits.
The new problem is recursive: if U is characterized by non-satiation, then the full-income constraint is binding and household utility is increasing in farm profit the higher the profits from the farm, the better off the household and the optimal choices of L and A do not appear in the objective function. The problem can then be rewritten as
c1 ,c2 ,1 , 2
max U (c1 , c2 , 1 , 2 )
subject to
In other words: with complete markets, production decisions only depend on prices and plot characteristics, and not on household endowments or preferences. This is called the Separation Property: production decisions are separable from consumption choices (but not the other way around).
u(c, )
Output, Consumption Good
c*
F ( L* , E A )
F ( L, E A )
w/ p
( w / p, E A )
Profit
L*
E L *
EL
Labor, - Leisure
The Separation Property holds even if one market is missing (e.g., in our example, either land or labor). The Separation Property rarely ever holds in practice, as it is quite likely that more than one market goes missing.
When there are multiple (i.e., two or more) market failures, the Separation Property fails to hold, and household consumption is constrained by household production, so to speak.
Suppose now that both markets (land and labor) are missing. The Separation Property does not hold: the household no longer maximizes profit, and production decisions depend on the preferences of the household and its endowments.
pc pF ( L f Lh , E A ) wLh wLm
L f Lm E L
Lm M
pc pF ( E L M , E A ) wM
U FL Uc
and the production decision now depends on preferences and endowments (see graph).
C
u(c, )
F ( L, E A )
c* q *
wM
Lf
M
Labor
Lf M -Leisure
Knowing what we know about market failures, we come to the crux of this section: What do the data have to say? In other words, does the Separation Property hold in practice? The short answer is that the bulk of the empirical evidence is in favor of rejecting the Separation Property.
Test: Household composition has no effect on the households labor allocation at the margin.
Benjamin cannot reject the null hypothesis.
Even though Pitt and Rosenzweig (1986) also cannot reject separation in an earlier round of the same Indonesian data, these results should be taken with a grain of salt. The vast majority of empirical studies reject the Separation Property (Collier, 1983; Carter, 1984; Jacoby, 1993; Kevane, 1994; Barrett, 1996; Udry, 1999).
For example, Jacoby rejects that the Separation Property holds in Peru. Idea: Households set their marginal productivity of labor equal to the market wage.
MPLi a bWi ei
What to remember from all this? The following points are key: What happens when the Separation Property holds? 2. The Separation Property holds if there is only one market failure. 3. When the Separation Property fails to hold, production decisions depend on preferences and endowments. 4. The Separation Property has been largely rejected.
1.
To overcome this, we can make strong assumptions about the intra-household distribution of resources For example, Beckers Rotten Kid Theorem assumes the household includes a benevolent dictator who redistributes resources efficiently, i.e., up to the point where everyones marginal utility of income is the same.
Intra-Household Modeling
There is no good reason, however, to believe that the unitary AHM is a good representation of reality. In fact, evidence points to the fact it is not (Alderman et al., 1995). Manser and Brown (1980) and McElroy and Horney (1981) develop models of the household based on cooperative game theory (i.e., bargaining within the household). In this case, resources are allocated efficiently, but the allocation is determined by threat points (i.e., the utility achieved by each individual in case of cooperation breakdown).
Intra-Household Modeling
Browning and Chiappori (1994), for their part, only assume that the intra-household allocation is efficient. If markets are complete, the households production decisions are not a function of its preferences or endowments (this should be familiar to you by now.)
Intra-Household Modeling
Browning and Chiapporis (1994) requirement that the households allocation efficient is much weaker than the requirements of the unitary AHM. Why is that? As a result, these efficient household models are more realistic and true to form than the unitary AHM.
Additionally, it makes a lot of sense for a households allocation of resources to be efficient (but think of what could make the efficiency assumption not hold)
Folbre (1984) originally asked why development microeconomists aggregate a number of individual preferences into a single utility function and offered a solid critique of the AHM. She then develops a conceptual framework with which to study households, based on four propositions.
Thus, Folbres paper constitutes the first pass at empirically studying intra-household models. Her empirical results contradict the benevolent dictator argument put forth by Becker, by and large, and indicate that the unitary household model might not be the best way to model households.
Similarly, Udry (1996) wishes to test the proposition that intrahousehold allocations are Pareto-efficient. After developing a relatively simple theoretical model, he proceeds to test empirically that gender has no effect on yields, i.e., whether a man or a woman exploits a given plot, the yield remains the same, ceteris paribus. Using data from Burkina Faso, he rejects the null hypothesis.
At the end of the day, he estimates that the output loss due to this inefficiency is about 6%, i.e., households operate at about 94% of their efficient level. Contrast this with Carrs (2011) qualitative evidence to the contrary. The evidence is thus damning to say the least both for the AHM and the efficient household model. Still, those models are often retained in the literature in order to study microeconomic phenomena that are external to the household.
If households do not behave in a unitary fashion, then transfer programs may not reach their intended recipients (e.g., food distribution programs and children). Depending on our goals, we may need a good understanding of how resources are allocated within the household (e.g., it is often preferable to give cash or food to women rather than men).
Using data from a rural area of the Philippines, we find that household mobile phone ownership is not associated with a significant increase in the price of onions. When controlling for who owns the mobile phone within the household, however, we find that mobile phone ownership by the farmer or his spouse is associated with price increases, but not ownership by the farmers children. It thus looks as though the intrahousehold allocation of technology may also matter.