Intrahousehold Commitment in a Dynamic Collective Environment

• Applicants: Professor Dr. Christian Bredemeier; Professor Dr. Falko Jüßen
• Subject Area: Economic Policy, Applied Economics
• Term: since 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 516317370

The family is an important economic institution. However, it has undergone striking changes since many policies were designed that are important for the family, such as social insurance or the tax system. Today, most families are dual-earner households, and the dissolution of households has been facilitated by the possibility of unilateral divorce. Both developments strengthen individual family members’ independence, but also weaken their commitment to the family. Policy recommendations should therefore be derived from models that, unlike the widely used unitary model of the household, take into account these characteristics of modern families. An appropriate framework for this purpose is the "limited commitment" approach, which accounts for potential, and changing, conflicts of interest between family members. In Module 1, we will introduce limited commitment into quantitative incomplete-markets models featuring various insurance channels to investigate additional costs of mutual insurance within the family that have so far been neglected by the literature. These additional costs result from the loss of bargaining power suffered by a family member whose negative income shock is compensated by other members. Since the optimal level of insurance provided by the government depends on the effectiveness of private insurance possibilities, we derive policy recommendations that take into account both the possibility of mutual insurance within the family and the costs implied by limited commitment for this type of insurance. In Module 2, we examine the empirical observation documented for several developed economies that married couples save more since unilateral divorce is possible. We quantify the importance of two competing explanations: Precautionary saving to insure against divorce risk and strategic overaccumulation of wealth to make divorce unattractive in the future. Based on this distinction, we will develop recommendations for the design of divorce laws. In Module 3, we will open up new possibilities for empirical research on commitment problems by introducing data on individual life satisfaction to this literature. Using these data allows us to circumvent the bottleneck identified in the literature that existing household panel data do not provide sufficient information on consumption expenditures that can be assigned to individual household members. Life-satisfaction data are collected at the individual level and hence allow a more direct testing of limited commitment and different theories of household decision making in general.

• DFG Programme: Research Grants