Nash Bargaining predicts Pareto-optimal allocations, but forward-looking household members should smooth away income shocks. We replace Pareto optimality with limited commitment and show how this resolves the puzzle of women borrowers voluntarily surrendering Grameen Bank loans to their husbands.

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Abstract

Much recent empirical work on intra-household allocation uses the axiomatic Nash Bargaining model to make predictions about how the distribution of consumption within the household will respond to individuals’ income shocks. However, one of the basic axioms underlying this approach is that allocations will be Pareto optimal, so forward-looking, risk adverse household members ought to be expected to smooth away any such response to income shocks—Pareto optimality seems to be too strong in a dynamic setting. In this paper we use explicitly dynamic framework and replace the axiom of Pareto optimality with a weaker notion of efficiency. We give a simple algorithm for computing allocations, and construct an extended example, meant to model the effects of Grameen Bank lending on intra-household allocation in Bangladesh. The model resolves a puzzle in the literature, namely, it predicts that women borrowers will often voluntarily surrender control (“pipeline”) their loans to their husbands.

BibTeX

@Unpublished{	  ligon02dynamic,
  author	= {Ethan Ligon},
  title		= {Dynamic Bargaining in Households (with an Application
                to {B}angladesh)},
  note		= {CUDARE Working Paper No. 25102, Department of Agricultural
                and Resource Economics, UC Berkeley},
  year		= 2002,
  url		= {https://escholarship.org/uc/item/1t52k4c5}
}