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Testing
Efficient Risk Sharing with Heterogeneous Risk Preferences
(with Shiv Saini):
Abstract:
Previous papers have tested efficient risk sharing under the
assumption of identical risk preferences. In this paper we show that, if
in the data households have heterogeneous risk preferences, the tests
proposed in the past reject efficiency even if households share risk
efficiently. To address this issue we propose a method that enables one
to test efficiency even when households have different preferences for
risk. The method is composed of three tests. The first one can be used
to determine whether in the data under investigation households have
homogeneous risk preferences. The second and third test can be used to
evaluate efficient risk sharing when the hypothesis of homogeneous risk
preferences is rejected. We use this method to test efficient risk
sharing in rural India. Using the first test, we strongly reject the
hypothesis of identical risk preferences. We then test efficiency with
and without the assumption of preference homogeneity. In the first case
we reject efficient risk sharing at the village and caste level. In the
second case we still reject efficiency at the village level, but we
cannot reject this hypothesis at the caste level. This finding suggests
that the relevant risk-sharing unit in rural India is the caste and not
the village.
Parents'
Preferences for Expenditure on Children When at Least One Parent Works
and Preferences Are Non-Separable:
Abstract:
The evaluation of policies
designed to increase the early investment in children
requires knowledge of the parents’ preferences for
expenditure on children. In this paper it is shown that
these preferences can be recovered using variables available
in commonly used datasets. The method proposed in this paper
improves upon the approach developed by Blundell, Chiappori,
and Meghir (2005) in two ways. First, it only requires that
one parent supplies a positive amount of labor. In the PSID,
98% of families with children have at least one parent who
participates in the labor market. The method proposed by
Blundell, Chiappori, and Meghir (2005) requires that both
parents work. In the PSID, both parents work only in 64% of
families with children. Second, the approach presented in
this paper does not require that the parents’ preferences
are separable in expenditure on children or the availability
of a distribution factor.
Individual Rather
Than Household Euler Equations: Identification and Estimation of
Individual Preferences Using Household Data:
Abstract:
In this paper it is shown that the intratemporal and
intertemporal preferences of each decision maker in the household can be
identified even if individual consumption is not observed. This
identification result is used jointly with the Consumer Expenditure
Survey (CEX) to estimate the intratemporal and intertemporal features of
individual preferences. This paper is the first attempt to provide
estimates of the wife's and husband's intertemporal preferences by
taking into account that household behavior is the outcome of joint
decisions. The empirical findings indicate that there is heterogeneity
in intertemporal preferences between wife and husband. The
identification and estimation results are important for at least two
reasons. First, they suggest that to answer policy questions the
household decision process should be characterized using one set of
preferences for each decision maker. Second, the estimates of individual
preferences provided in this paper can be used to evaluate policies
aimed at affecting household intertemporal behavior.
Savings, Risk Sharing and Preferences For Risk:
Working Paper Version of
"Savings, Risk Sharing and Preferences
for Risk," American Economic Review,
Vol. 94, No. 4, (September 2004): pp. 1169-1182.
Abstract:
Saving decisions are made jointly by
household members who generally earn risky incomes. Consequently, to
interpret saving patterns it is crucial to analyze the relationship
between intra-household risk sharing and intertemporal choices. To that
end in this paper the household is characterized as a group of agents
with possibly heterogeneous preferences making efficient decisions. Two
results are obtained. First, it is shown that risk sharing can increase
the amount saved by the household. Second, I find that an increase in
risk aversion and prudence of an individual member can reduce household
risk aversion and prudence. These results are consistent with the
empirical evidence collected using the HRS.
Household Intertemporal Behavior: A
Collective Characterization and Empirical Tests:
Table with Results Obtained Using the
PSID:
Abstract: In
this paper, a formal test of intra-household commitment is derived and
performed. To that end, two models of household intertemporal behavior
are developed. In both models, household members are represented using
individual preferences. In the first formulation, household decisions
are always on the ex-ante Pareto frontier. In the second model, the
assumption of intra-household commitment required by ex-ante efficiency
is relaxed. It is shown that the full-efficiency household Euler
equations are nested in the no-commitment Euler equations. Using this
result, the hypothesis that household members can commit to future
allocations of resources is tested using the CEX. I strongly reject this
hypothesis. As an additional result, it is also shown that the standard
unitary framework is a special case of the full-efficiency model.
However, if household members are not able to commit, household
intertemporal behavior cannot be characterized using the standard
life-cycle model. These findings have two main implications. First,
policy makers can change household behavior by modifying the decision
power of the individual household members. Second, the standard unitary
model should not be used to evaluate programs designed to improve the
welfare of household members.
Intertemporal Behavior and Household
Structure:
Additional
Tables:
Abstract: In this
paper, the traditional household Euler equations are estimated for
singles and separately for couples. Using the CEX and the PSID, I reject
the Euler equations of couples, but I cannot reject the Euler equations
of singles. To rationalize this result, I develop an intertemporal model
with two features. First, household members are represented using
individual preferences. Second, household members cannot commit to
future allocations of resources. It is shown that an excess sensitivity
test should generally reject the household Euler equations of couples,
but not of singles. A test is then derived to evaluate the explanation
given in this paper against alternative hypotheses using a
proportionality condition which is specific to the intertemporal model
introduced here. I cannot reject the rationalization provided in this
paper.
Labor Supply,
Wealth Dynamics, and Marriage Decisions (with Shintaro
Yamaguchi):
Abstract: Evidence
collected using the Panel Study of Income Dynamics (PSID) indicates that
labor supply, saving, and marital decisions are strongly linked. This
paper has two main goals. The first is to develop a realistic model of
household behavior that captures the empirical features of labor supply,
saving, and marital choices. The second goal is to simulate the model
using the PSID. The results indicates that the proposed model can match
most of the features displayed by the data. They also suggest that the
relationships between labor supply, saving, and marital status decision
are important features of household behavior that should be considered
by economists and policy makers when designing and implementing policies
formulated to change the welfare of household members.
Labor Supply Decisions and
Commitment Within The Household: The Effect of The Irish Divorce Law
(with
Pierre-Andre Chiappori)
Intra-household Allocation
with Limited Commitment: an Empirical Characterization
(with Orazio
Attanasio)
Abstract:
We model the
household as two agents making joint decisions under limited commitment.
We find that each household can be in three different regimes: both
agents are satisfied with the household allocation of resources; the
first agent would rather be in autarky; the second agent would prefer to
be in autarky. In each regime, individual Euler equations have different
characteristics. In particular, if one agent would rather
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