Endogenous Household Interaction

Most econometric models of intrahousehold behavior assume that household decision making is efficient, i.e., utility realizations lie on the Pareto frontier. In this paper we investigate this claim by adding a number of participation constraints to the household allocation problem. Short-run constraints ensure that each spouse obtains a utility level at least equal to what they would realize under (inefficient) Nash equilibrium. Long-run constraints ensure that each spouse obtains a utility level at least equal to what they would realize by cheating on the efficient allocation and receiving Nash equilibrium payoffs in all successive periods. Given household characteristics and the (common) discount factor of the spouses, not all households may be able to attain payoffs on the Pareto frontier. We estimate these models using a Method of Simulated Moments estimator and data from one wave of the Panel Study of Income Dynamics. We find that, while short run constraints are binding for a sizable set of agents in the sample, long-run constraints are not. Thus gains from efficient behavior are large enough, and households forward-looking enough, to prevent deviations from efficient outcomes. We conclude that it is important to account for a variety of possible implementation constraints when determining efficient household outcomes, even if some subset of the constraints are ultimately found to be non-binding when the model is estimated in a logically-consistent fashion.