ESSAYS ON THE HOUSEHOLD:
FORMATION, RESOURCE ALLOCATION AND CONSEQUENCES FOR THE LABOR MARKET

ABSTRACT

Economists have hypothesized that households are a mechanism by which individuals can share risk, enjoy economies of scale and benefit from the free trade of different endowments between members. They have also noted that understanding how households allocate resources is important when targeting policy at specific outcomes (such as higher female education or increased child nutrition). But also important is to consider the larger landscape of households-to understand their formation and consequences for the economy, as well as the decisions made within them. Basically, there are three broad ways in which we can understand the economics of households: (1) How can the existence of households affect the economy in general? (2) How do households function as a mechanism by which resources are collected and disseminated among individuals? (3) And, finally, how are households formed? This dissertation addresses elements of each of these important issues in turn.

Each essay in this trio examines a distinct aspect of households-specifically, they address their effects on labor market equilibria, their resource allocation within and their formation. The first essay starts from a point at which families or communities of individuals exist. It draws on the reasonable assumption that individuals within these units share amongst themselves and determines how this sharing might affect labor market equilibria (especially in developing countries where resources are particularly scarce). The second essay considers directly how this sharing or resource allocation is determined within the household. It explores the possibility that expenditures on household public goods may be a consequence of bargaining power between decision-making agents rather than a result of different preferences for these public goods. And the final essay looks at a new type of marriage contract, the covenant marriage, and comments on how individuals choose contract strength based on their individual and couple characteristics. This essay also provides preliminary evidence about how contract strength may affect the sustainability of marriages and consequently households.

The first essay, A Theory of Efficiency Wage With Multiple Unemployment Equilibria, uses efficiency wage theory and the existence of community-based sharing to hypothesize that labor markets in developing countries have multiple equilibria-the same economy can be stuck at different levels of unemployment with different levels of wages. The result is constrained to poor economies where wage productivity models seem to be applicable and income sharing among the poor is prevalent. The essay theoretically establishes a mutual reinforcement of income sharing and unemployment. That more unemployment leads to more income sharing is a logical extension of evidence and the fact that more sharing increases unemployment rates is established theoretically in the model. As a corollary, the essay shows that within the same society, two different racial groups, that may be ex ante identical, can have different levels of unemployment and wages in equilibrium. This paper provides an example of how the existence of sharing households can affect the larger economy-specifically how sharing between people within groups can lead to different labor market outcomes.

The second essay, titled Husbands, Wives and the Peculiar Economics of Household Public Goods, is concerned with understanding how household income is allocated among different types of expenditures. This is of the utmost importance when considering policy targeted at increasing household well-being. This essay uses the collective household model to determine how household public goods and household public bads are chosen in light of the relative power balance between a husband and a wife. It shows both theoretically and empirically that the effect of additional female power on household outcomes depends on the initial level of female power. And contrary to previous findings that attribute differences in spending based on power differentials to gender specific preferences for household well-being, the relationship between female power and expenditures on household public goods need not always be positive. The essay shows that if the differences in how money is spent when it is in the control of the woman rather than the man is based on an underlying bargaining mechanism rather than gender specific preferences the relationship is non-monotonic. The policy implications of this non-monotonic relationship between female decision-making power and household well-being outcomes are important. It means the effectiveness of aid to households depends not only on current expenditure levels, but also on household balance of power. More specifically, the welfare impact of a monetary transfer is larger for households where power is more out of balance, rather than merely larger for the poorest households.

Finally, Will You Covenant Marry Me? A Look at a New Type of Marriage, comments on household formation by analyzing marriage contracts of varying strength. In a backlash to the growing divorce rate, Louisiana, Arkansas and Arizona have begun to offer covenant contracts, which are a stronger form of legal marriage. From a policy and public finance standpoint it is important to understand how the availability of this stricter form of marriage may change fundamentally the marrying behavior of couples. This analysis of covenant marriage contracts uses both standard and behavioral economic approaches to explore theoretically why couples may choose a covenant over a traditional marriage and provides theoretical predictions about the types of individuals in covenant and traditional marriages. It utilizes Louisiana marriage certificate data, including all marriages from 1990 to 2003, to empirically determine what individual and couple characteristics affect the decision to marry covenantly. Though covenant marriage has only recently been an option and relatively few couples have chosen this stricter contract, parish level data is used to get an initial understanding of whether or not there is a correlation between divorce rates and covenant marriage rates. This provides preliminary evidence as to whether or not this option is effective in its goal of creating stronger, happier unions, and paves the way for more detailed empirical and theoretical analysis of this interesting new phenomenon.