Household Utility Function Research Articles

Time preference assumptions in normative analyses of household financial decisions

Economists conducting normative analyses of household financial decisions typically assume specific values of parameters of the household utility function. We review 12 normative analyses and discuss justifications for the personal discount rates assumed. None of the normative articles cited an independent estimate of the personal discount rate. Instead, the authors made arbitrary assumptions or cited another article’s assumption. We conclude with recommendations for assumptions about the personal discount rate in normative analyses of household financial decisions.

Investment Shocks: A Source of Fluctuations in a Small Open Economy

This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy.

Non-Keynesian effects of fiscal policy in OECD economies: an empirical study

This article explores the hypothesis that the propensity to consume out of income varies in a nonlinear fashion with fiscal variables, and in particular with government debt per capita. Using panel data from 18 Organization for Economic Cooperation and Development (OECD) countries, we examine whether there is any empirical evidence to support the hypothesis that households move from non-Ricardian to Ricardian behaviour as government debt reaches high levels and as uncertainty about future taxes increases. Our results provide support for this hypothesis, and also suggest that private and government consumption are complements in the household utility function.

Aggregate Labor Supply

Macroeconomics has made tremendous advances following the introduction of labor supply into the field. Today, it is widely acknowledged that labor supply matters for many key economic issues, particularly for business cycles and tax policy analysis. However, the extent to which labor supply matters for such questions depends on the aggregate labor supply elasticity—that is, the sensitivity of the time allocation between market and nonmarket activities. For several decades, the magnitude of the aggregate labor supply elasticity has been the subject of much debate. In this article, we review the debate and conclude that the elasticity of labor supply of the aggregate household is much higher than the elasticity of the identical households being aggregated. The aggregate household utility function differs from the individuals’ utility functions for the same reason that the aggregate production function differs from the individual firms’ production functions being aggregated. The differences in individual and aggregate supply elasticities are what aggregation theory predicts.

Asset liability management for individual households

AbstractPersonal finance is a challenging topic which can benefit from a scientific approach to individual financial planning. This paper presents an individual asset liability management (iALM) model for life cycle planning which uses the methodology of dynamic stochastic optimisation and incorporates ideas from both classical and behavioural finance. Its implementation is in the form of a decision support tool for use by financial advisers or wealth managers. The investment universe is given by a set of indices for major asset classes and their returns are simulated forward over the lifetime of a household. On the liability side the foreseen cash flows of incomes and outgoings are simulated and punctuated by life events such as illness and death. The household's utility function is constructed for each time period over a range of monetary values in terms of household financial goals and preferences. Taxes and pension savings are treated using the tax shielded saving accounts specific to a national jurisdiction in terms of constraints in the optimisation sub-models. The paper goes on to present an analysis ofiALM model recommendations for a representative UK household, together with an evaluation of the sensitivity of the financial plan generated to changes in market environments such as the 2007–9 crisis. The promise of this new technology is to bring modern decision support tools to individual investors in order to facilitate custom designed consumption, savings and investment policies.

Transaction costs and planner intervention

In this paper, I examine a two-period general equilibrium model in which transaction costs are incurred whenever financial contracts are traded. These transaction costs are real and convex. The presence of these transaction costs results in a Pareto inefficient equilibrium allocation. Attempting to fix this problem, the planner will intervene by scaling the transaction costs either up or down. The intervention must satisfy fiscal balance meaning that the summed value of transaction costs will remain constant. I prove that over a generic subset of household utility functions and endowments and subject to an upper bound on the number of household types, there exists an open set of planner interventions that lead to a Pareto superior allocation.

Heterogeneity in farmers’ production decisions and its impact on soil nutrient use: Results and implications from northern Nigeria

Sustainable use (in terms of nutrients) of soil resources by farmers in Sub-Saharan Africa is constrained by institutions and markets. This paper explores the case of northern Nigeria, by using a combination of multi-attribute utility theory and bio-economic modelling. This approach allowed us to identify heterogeneity in production strategies and to quantify its effect on the use of soil nutrient resources. We find that farmers with larger land holdings place more emphasis on gross margins in their utility function, while those with larger holdings of fertile fadama fields place more emphasis on sustainability. Risk aversion, operationalised through variance minimization, appears an important attribute in the utility function of many farm households that are more dependent on agriculture for their overall income. A regression analysis shows that differences in production strategies significantly affect nutrient balances, but also shows that such effects are heterogeneous across locations. We find more favourable nutrient balances for some of the more market-oriented farm households who place more emphasis on sustainability. In farm plans of the most risk-averse households, the production of cereals for subsistence consumption dominates and leads to negative soil nutrient balances, especially for potassium. Farmers who place a large importance on gross margins are likely to benefit most from policies aimed at enhancing profitability through improving functioning of markets. The large group of risk-averse farmers will have the largest immediate gain in utility from policies and technologies aimed at reducing production risk in high-value crops. Additional policies aimed at creating a stronger market-oriented production by the least-endowed farm households could play a role in reducing intensity of soil fertility mining. Under these conditions, the efficient cropping pattern shifts partially from cereal cropping to high-value crops, associated with higher input use. The main results are similar to those in other studies, although some of the nutrient balances are less negative. The results do appear to be sensitive to the type of cropping activities included in the analysis, and additional methodological research is required. Extensions of the used method should further account for temporal and spatial differences in soil fertility, leading to differences in nutrient uptake and production, as well as potential temporal heterogeneity in production strategies.

A review of the antecedents of union dissolution

Abstract The question of what factors contribute to the stability of coresidential partnerships has attracted the attention of many social scientists. This study summarizes recent research on the determinants of union dissolution within a set of substantive themes. Special emphasis is placed on the past two decades of research. European as well as American contributions are considered. 1. Introduction In this paper, we offer a brief review of research into the social, demographic, and economic factors that contribute to the dissolution of coresidential relationships. In contemporary industrialized societies, the break-up of a coresidential relationship is an increasingly common life course event (Andersson and Philipov 2002), and it is consequential both for adults and children (Amato 2000). Our focus is chiefly on demographic research on antecedents of separation (moving apart) and divorce. While many of the studies to date have concentrated on the dissolution of marriages rather than of cohabiting unions-mainly because there is less data on unmarried couples who live together-a larger body of literature on cohabiting unions is emerging. A related line of research focusing on more subjective and psychological factors, such as union quality and marital interactions, will not be summarized in this paper. Very good reviews of these research areas are available (Bradbury, Fincham, and Beach 2000; Gottman and Notarius 2000). Moreover, the present summary is, for the most part, restricted to studies published in international peer-reviewed journals. The most recent article that provided a broad summary of dissolution determinants covered the period up to the year 1990, and focused on American contributions (White 1990). Indeed, much of what we then knew about factors that influence the propensity to divorce was based on American research. In recent decades, research on the antecedents of union dissolution has expanded significantly, especially in Europe. We exclude studies that primarily relate to less developed countries. Most of this research is, either explicitly or implicitly, based on a micro-level theory of individual choice and couple-level bargaining. The early work by Gary Becker and colleagues (Becker, Landes, and Michael 1977) assumed a unitary household utility function, while later economic theory has more explicitly acknowledged that men and women may have differing incentives/disincentives (Lundberg and Pollak 1996). Meanwhile, sociologists have formulated theories explicitly including structural and cultural constraints (Levinger 1976, Brines and Joyner 1999, South, Trent, and Shen 2001). Whether it is completely tacit or it is formulated in terms of either microeconomics or rational actor-based sociology, there seems to be an agreement that the dissolution process involves some variant of utility maximization. This has been called the utilitarian synthesis by Brines and Joyner (1999). To augment the idea of utility maximization, various additional theoretical ideas have been invoked by researchers. These ideas connect the partners with, for example, their childhood experiences, their own union and childbearing histories, the resources brought into the partnership, their integration into labour markets, the organization of domestic life, and the social surroundings. The paper is organized in sections, with each covering one strand of research on factors related to union dissolution. In some subfields, there is plenty of research; whereas in others, our knowledge is rather sparse. A brief conclusion also comments on trends in union dissolution research. 2. Age, period, and cohort The basic time dimensions of union dissolution-namely, the spouses' ages, the duration of their union, the period, and the union cohort (the time the partners moved in together or married)-were given more attention in the 1980s than they are now. The increase in divorce risk over (historical) time can be a cohort-driven phenomenon: different cohorts may bring, for example, different experiences, resources, and expectations to their unions, and these differences may translate into higher divorce risks for younger cohorts. …

Endogenous Labour Supply with Several Occupational Categories in a Bi-regional Computable General Equilibrium (CGE) Model

Decaluwé B., Lemelin A. and Bahan D. Endogenous labour supply with several occupational categories in a bi-regional computable general equilibrium (CGE) model, Regional Studies. To make labour supply endogenous in the Québec Finance Ministry Québec–Rest-of-Canada bi-regional computable general equilibrium (CGE) model, household utility functions include as many types of leisure as there are occupational categories. Each household is modelled as a group of individuals who maximize utility independently, while sharing identical preferences for goods. Therefore, the consumption of goods is the same as in a standard linear expenditure system (LES), but cross-elasticity of supply of any labour category relative to another's wage rate is zero. Marginal income tax rates represent not only personal income taxes, but also implicit taxation of income through transfer reduction. Model behaviour is consistent with analytical expectations. Decaluwé B., Lemelin A. et Bahan D. L'offre de travail endogène du modèle bi-régional Québec-Reste-du-Canada du Ministère des finances du Québec dérive de fonctions d'utilité avec autant de types de loisir que de catégories professionnelles. Chaque ménage est constitué d'individus maximisant leur utilité indépendamment, ayant néanmoins des préférences identiques pour les biens. Résultat: la consommation de biens est comme dans un SLD standard, mais l'élasticité-prix croisée de l'offre entre les catégories de travail est nulle. Les taux marginaux d'imposition du revenu représentent les impôts personnels, mais aussi la taxation implicite du revenu résultant de la réduction des transferts. Le modèle se comporte conformément aux prédictions théoriques. Modèle d'équilibre général bi-régional Offre de travail ménagère Decaluwé B., Lemelin A. und Bahan D. Endogenes Angebot an Arbeitskräften in mehreren Berufssparten in einem biregionalen berechenbaren allgemeinen Gleichgewichtsmodell (CGE-Modell), Regional Studies. Um das Angebot an Arbeitskräften im biregionalen berechenbaren allgemeinen Gleichgewichtsmodell (CGE-Modell) des Finanzministeriums von Québec für die Region Québec und das übrige Kanada endogen zu gestalten, werden bei den Haushaltsnutzenfunktionen ebenso viele Freizeitarten wie Berufssparten berücksichtigt. Jeder Haushalt wird als Gruppe von Personen modelliert, die den Nutzen unabhängig voneinander maximieren und dabei identische Güterpräferenzen aufweisen. Der Güterverbrauch ist daher derselbe wie bei einem herkömmlichen linearen Ausgabensystem (LES), wobei sich jedoch die Kreuzelastizität des Angebots einer Arbeitskraftkategorie in Bezug auf den Lohnsatz einer anderen Kategorie auf Null beläuft. Die marginalen Einkommenssteuersätze beziehen sich nicht nur auf die privaten Einkommenssteuern, sondern auch auf die implizite Einkommensbesteuerung durch Transferreduktion. Das Verhalten des Modells entspricht den analytischen Erwartungen. Berechenbares allgemeines Gleichgewicht (CGE) Arbeitskraftangebot von Haushalten Decaluwé B., Lemelin A. y Bahan D. La oferta endógena de trabajo con varias categorías laborales en un modelo de equilibrio general computable bi-regional, Regional Studies. Para que la oferta de trabajo sea endógena en el modelo de equilibrio general computable bi-regional del Québec y el resto del Canadá empleado por el Ministerio de Hacienda, se tienen en cuenta las funciones de utilidad con tantos tipos de ocio como categorías laborales. Cada hogar se modela como un grupo de individuos que maximizan la utilidad de modo independiente a la vez que comparten preferencias idénticas de bienes. Por consiguiente, el consumo de bienes es el mismo que en un sistema lineal de gastos pero la elasticidad cruzada de la oferta de cualquier categoría laboral relativa a la tasa salarial de otra categoría es nula. Las tasas marginales del impuesto sobre la renta representan no sólo los impuestos sobre la renta de las personas físicas sino también el impuesto implícito de la renta mediante la reducción de transferencias. El comportamiento del modelo corresponde a las expectativas analíticas. Equilibrio computable general Oferta laboral de los hogares

Private Sector Consumption and Government Consumption and Debt in Advanced Economies An Empirical Study

This paper explores the hypothesis that the propensity to consume out of income varies in a non-linear fashion with fiscal variables, and in particular with government debt per capita. Using data from eighteen OECD countries the paper examines whether there is any empirical evidence to support the hypothesis that households move from non-Ricardian to Ricardian behavior as government debt reaches high levels and as uncertainty about future taxes increases. Our results provide support for this hypothesis, and also suggest that private and government consumption are substitutes in the household utility function.

Engel curves and the unitary theory of the household

AbstractPreviously unutilized household budget data are used to fit Engel curves to test Gary Becker's unitary theory of the household. If resources are fungible and are allocated to maximize a household utility function, the pattern of outlay should be invariant to control over and sources of income. The earnings of wives and Engel curves for food, rent, clothing, light and fuel, insurance and sundries are estimated using the two‐step method of Murphy and Topel. Although working wives contributed an average of 20% of household income, the coefficient of their earnings is not significant in every Engel curve estimated. It appears that Becker's altruist head of the household is the housewife/financial manager, at least in New York City in the early twentieth century.

Endogeneous Household Interaction

There is a long history of the theoretical and empirical investigation of the labor supply decisions of married women. Perhaps the starting point for modern econometric analysis of this question is Heckman (1974), in which a neoclassical model of wives’ labor supply was estimated using disaggregated data. He explicitly estimated the parameters characterizing a household utility function, which included as arguments the leisure levels of wives and household consumption. With the addition of a wage function, Heckman was able to consistently estimate household preference parameters and the wage function in a manner that eliminated the types of endogenous sampling problems known to create estimator bias when the participation decision is ignored....

Collective Labor Supply of Native Dutch and Immigrant Households in the Netherlands

We estimate a collective time allocation model, where Dutch, Surinamese/Antillean and Turkish households behave as if both spouses maximize a household utility function. We assume that paid labor and housework are the endogenous choice variables and furthermore consider household production. Surinamese/Antillean and Turkish women differ from Dutch women because they value (joint) household production more in their utility function. Surinamese/Antillean and Turkish men, on the other hand, value joint household production less then Dutch men. Turkish households are the more traditional households, in the sense that the woman is more oriented on household production, while the man is oriented on paid labor. It is often believed that the bargaining power of women in more traditional households is relatively low, but our estimation results do not support this idea. In general, the wage elasticities of Dutch, Turkish and Surinamese/Antillean households are comparable. Men and women replace housework hours by paid labor if their hourly wage rate increases but do the opposite when the hourly wage rate of the partner increases.

Modeling household discrete choice behavior incorporating heterogeneous group decision-making mechanisms

To represent heterogeneous group decision-making mechanisms in choice behavior, this paper attempts to develop a new household discrete choice model by integrating different types of household choice models based on latent class modeling approach under the principle of random utility maximization, where household utility function at each model is defined to theoretically reflect its members’ preferences and intra-household interaction. A latent class corresponds to a particular group decision-making mechanism. The proposed model can deal with not only the choice situations where multiple household members involved in joint decision are known a priori, but also the situations where the involved members are unknown. As a case study, three types of household utility functions are dealt with: multi-linear, maximum and minimum types, in the context of couples’ car ownership behaviors. Due to the limited sample size, paired combinations of the three utilities are examined and compared. Using the data collected in two Japanese cities in 2004, the effectiveness of the proposed household decision model is empirically confirmed. It is found that changes of utility combinations result in very complicated variations in both signs and values of the model parameters and choice probabilities by multi-linear utility show small variations across different combinations.

A public good version of the collective household model: an empirical approach with an application to British household data

In this paper we consider an empirical collective household model of time allocation for two-earner households. The novelty of this paper is that we estimate a version of the collective household model, where the internally produced goods and externally purchased goods are assumed to be public. The empirical results suggest that (1) Preferences of men and women differ; (2) Although there are significant individual variations, on average the utility functions of men and women are equally weighted in the household utility function; (3) Differences in the ratio of the partners’ hourly wages are explanatory for how individual utilities are weighted in the household utility function. (4) The female’s preference for household production is influenced by family size, but this does not hold for the male; (5) Both the male and the female have a backward-bending labor supply curve; (6) Labor-supply curves are forward-bending with respect to the partner’s wage rate; (7) Our model rejects the unitary Slutsky symmetry condition.

A Public Good Version of the Collective Household Model: An Empirical Approach with an Application to British Household Data

In this paper we consider an empirical collective household model of time allocation for two-earner households. The novelty of this paper is that we estimate a version of the collective household model, where the internally produced goods and the externally purchased goods are assumed to be public. The empirical results suggest that: (1) Preferences of men and women differ; (2) Although there are significant individual variations, on average the utility functions of men and women are equally weighted in the household utility function; (3) Differences in the ratio of the partners' hourly wages are explanatory for how individual utilities are weighted in the household utility function. (4) The female's preference for household production is influenced by family size, but this does not hold for the male; (5) Both the male and the female have a backward-bending labor supply curve; (6) Labor-supply curves are forward-bending with respect to the partner's wage rate; (7) Our model rejects the unitary Slutsky symmetry condition.

A Public Good Version of the Collective Household Model: An Empirical Approach with an Application to British Household Data

In this paper we consider an empirical collective household model of time allocation for two-earner households. The novelty of this paper is that we estimate a version of the collective household model, where the internally produced goods and the externally purchased goods are assumed to be public. The empirical results suggest that: (1) Preferences of men and women differ; (2) Although there are significant individual variations, on average the utility functions of men and women are equally weighted in the household utility function; (3) Differences in the ratio of the partners' hourly wages are explanatory for how individual utilities are weighted in the household utility function. (4) The female's preference for household production is influenced by family size, but this does not hold for the male; (5) Both the male and the female have a backward-bending labor supply curve; (6) Labor-supply curves are forward-bending with respect to the partner's wage rate; (7) Our model rejects the unitary Slutsky symmetry condition.

Comment

Comment

Does a Decrease in the Population Prevent a Sustainable Growth of an Environmentally Friendly City? -A Comparison of Cases of Decreasing and Increasing Populations of Obihiro Metropolitan Area, Japan by an Intertemporal CGE-Modeling Approach-

In developed countries, more than 70% of the people lives in urbanized areas. This causes the fact that low population density urban areas are expanding resulting from promotion of motor vehicle transportation, and hollowing out in centers of cities with more energy consuming structure. These phenomenon increase discharges of carbon dioxide, waste, and other pollutants, thus a new city structure should be explored. Among others, environmentally friendly city has been drawing attention. The concept of environmentally friendly city refers to less environmental load and higher amenity. This article focuses on an environmentally friendly city. From this point, the authors have already developed static computable general equilibrium (CGE) models of Obihiro metropolitan area in Hokkaido prefecture, Japan. However, the environmentally friendly city has a dynamic nature. Therefore this paper aims to extend the authors’ previous models into an intertemporal framework, maximizing the sum of discounted household utility function under a scenario of future decreasing population that reflects the current trend of population growth in Japan. And then the intertemporal economic impacts of promotion of waste recycling are numerically analyzed by applying the new model. Finally cases of decreasing and increasing populations of the study area are compared with showing the economic implication of decreasing population.

Testing Unitary Models of Labor Supply on Decision-Making Systems: Evidence from Japan

This study aims to test whether unitary models are consistent with Japanese household behavior. The methodology uses information regarding household decision-making systems to test unitary models. The method used in this study differs from those used in previous literatures. Unitary models are categorized into three types. First, a dictatorial family member in a household decides the household resource allocation based on his/her utility function. Second, all the family members have the same utility functions. Third, all the family members have different utility functions but they approve of a household utility function that represents the sum of their respective utility functions using the exogenous welfare weight. Some Japanese surveys show that the first category is not realistic. Therefore, this study considers the second and third types. This method aims to interpret the type of decision-making system selected by households as a proxy variable for the welfare weight. When controlling for individual and household characteristics, if the differences in the decision-making systems between households affect the distributions in household resource allocation, it can be concluded that one family member's preference is not similar to another's. Therefore, the second type is rejected. If the decision-making systems are endogenously determined by the extra-household environmental parameters (EEPs), it is valid to interpret that the distribution of the decision-making power is a proxy variable for the endogenous welfare weight. Therefore, the third type is rejected. The estimation strategy is used to consider the selectivity bias. In case individuals with a specific characteristic all tend to select a specific decision-making system, the effect of this decision-making system on the household resource allocation should be estimated independently from the effect of the characteristic on the allocation. If the effect of the decision-making system is not independently estimated, the estimation will include selectivity bias. In order to exclude the bias, this study employs the treatment effect model provided by Barnow, Cain, and Goldberger (1980). The analysis uses micro data from the 2000 and 2001 Japanese General Social Survey (JGSS), which is a nationwide cross-sectional survey; the analysis focuses on the data of two earner couples. The estimation results reveal that in a household wherein the wife is the principal decision-maker, the husband works 15% more and the wife works 59% less than is the case in a household that adopts a different decision-making system. The effect of the household decision-making system on labor supply is consistent with the implications derived from both the collective and Nash bargaining models. Further, the variables regarded as the EEPs (husband's and wife's wage rates, the proxy variable for nonwage income, health conditions) affect the type of decision-making system that the household selects. In particular, it is found that a spouse who is healthy and has the ability to earn a high income tends to have strong decision-making power in the household. These two results show that the unitary model is rejected, and the family members' decision-making power shows the property of endogenous welfare weight assumed by both the collective and Nash bargaining models.