Economic Reasons for the Rise and Fall of Families

By Sarah Day

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 In the study of economics, it is often the self-interested individual that makes rational decisions that is examined, and all too often the individual as part of a larger unit—the family—is completely ignored. The truth is that the family can play an important role in defining the economic decisions of individuals and that, conversely, individuals’ economic decisions have a considerable effect on the longevity of the family as a unit. In order to further understand the rise and fall of families, this paper will explore the family as an economic unit, the models explaining family economic behavior, and the results of a study done on a UK policy to redistribute resources within families.

The benefits of forming a family, beyond the reasons of love and creating offspring to replace oneself in society, are to maximize production and efficiency. If two people collaborate so that one person specializes in earning a higher wage outside the home and one person specializes in home production or services, both will have a comparative advantage—the first in goods because of higher earning power and the second in time. In this situation, there are gains from trade because both people have higher output. These classical economic ideas of specialization and comparative advantage show that the family, despite its small size, can still operate with economies of scale, allowing all members to pool their resources and collectively gain. A few factors that affect the degree of "success" that families have include the extent to which family members specialize, the extent to which members cooperate with individual preferences, and the higher consumption possibilities that result from healthy relationships (especially those with children or planning to have children). Ermisch states, "factors which reduce the expected gains from household cooperation not only increase the risk that the household will dissolve, but also reduce specialization in the household division of labour, which in turn reduces further the gains from household formation and discourages specialization." For instance, studies have shown that there is a positive relationship between divorce and women’s employment, and other lifestyle trends such as having fewer children later in life also tend to increase the rate of divorce. In addition to exploring the reasons that families are formed and sometimes dissolved, it is interesting to consider the economic models explaining the behavior of the family as an economic unit.

There are several theories that attempt to explain the economic behavior of the family. One is the common preference model which was introduced Becker in 1981. Becker states that within a family, collective resources will be maximized when one altruistic member (usually a parent) is in charge of allocating resources. When this happens, the altruistic member not only maximizes his/her own utility, but also the utility of other family members. Becker’s "altruistic model" is quite different from the common preference model originally proposed by Samuelson in 1956, which presupposes that the family functions as a unit with the common goal of maximizing its collective utility. While Samuelson does not explain how consensus in family decision-making could be reached but assumes that is possible, Becker’s model presumes that consensus is not plausible within the family unit.

Both Becker and Samuelson’s common preference models have been heavily criticized in recent years, mainly for their assumption of income pooling within the family. Rising divorce rates especially have been incentive for economists to develop alternative models. It is generally thought that divorce results from a situation where one household member has a higher utility than the other member, such that the union of marriage is no longer allowing for maximum efficiency. Divorce, therefore, could be caused by a distribution of resources that can not be accounted for in the pooling or common preference models. What kind of alternative models have economists created to explain this insufficiency? The bargaining models developed in the 1980s offer an answer.

Bargaining models typically allow for two family members (usually husband and wife) with distinct preferences that shape family consumption. Each person has their own utility function based on their consumption of private goods. When both people are able to agree, their utilities intersect at some point of maximum utility. If, however, these two people cannot find agreement, the "payoff received" is shown by a "threat point" that represents the utilities from a noncooperative equilibrium within marriage (or perhaps divorce). In the Nash bargaining model, "the utility received by husband or wife…depends upon the threat point; the higher one’s utility at the threat point, the higher one’s utility in the Nash bargaining solution." What this means is that family demands depend on the determinants of the threat point and not solely on prices and total family income.

Other bargaining models are the divorce-threat models and the separate spheres model. In the divorce-threat model, the threat point represents the maximum utility that one could attain outside of the marriage. This point often depends on environmental factors that do not necessary affect utility directly, such as the income available for divorced individuals and the conditions in the remarriage market. One possible example of these factors would be a policy change in laws regulating the distribution of property to men and women upon divorce, which would change the threat point in two-parent families.

In the separate spheres model, the threat point is not external like it is for the divorce-threat model. Consequently, in Nash bargaining, the husband and wife have the option of an inefficient noncooperative equilibrium within marriage, rather than an agreement. In this noncooperative equilibrium, each spouse offers household public goods, "choosing actions that are utility-maximizing, given the actions of their partner." Because divorce can drain so many benefits from both people in the relationship, this noncooperative equilibrium allows for another option that still grants some benefits from joint consumption. The model suggests (as do Lundberg and Pollack) that this noncooperative marriage will allocate certain responsibilities to the husband and others to the wife, the distribution of which reflects social norms rather than different preferences or levels of productivity of the two people. Accordingly, in the noncooperative equilibrium, the utility of both the man and woman depend on each person’s separate incomes rather than their total family income.

As tests based on variation in income by husbands and wives have rejected the pooling hypothesis, the implication is that intrafamily allocation of resources is ineffective and that policy changes could effect these inequalities. The Child Benefit policy that was implemented in the UK during the late 1970s provides a unique opportunity to look at such an experiment. The policy was developed with the intention of moving more resources from husbands to wives as a way to increase spending on children. The method was to reduce the amount withheld for taxes from the father’s paycheck and turn this money into a cash payment for the mother. While some saw the policy as a benefit to wives and children, others saw it as a father disbenefit. In order to study the effectiveness of the distribution, economists looked at the changes in expenditure on clothing. Given traditional gender roles in the household, it was expected that the mother would be more apt to purchase clothing for her children than the father and that expenditure in this sector would change with the implementation of the Child Benefit policy. That expectation was supported by the results, which showed an increase in relative expenditures on both children’s and women’s clothing. Therefore, the Child Benefit policy was successful in the reallocation of resources within families. After outlining the different models of resource allocation and family economic behavior, this empirical study presents an interesting opportunity to consider how effective further or different policy changes might be in breaking down the social and economic inequalities that exist within families.

References:

Theodore C. Bergstrom, "Economics in a Family Way", Journal of Economic Literature, Vol. XXXIV, No. 4, December,1996, pp. 1903-1934.

John Ermisch, "Familia Oeconomica: A Survey of the Economics of the Family", in Scottish Journal of Political Economy, Vol.40, No. 4, November 1993, pp. 353-374.

Shelly Lundberg and Robert A. Pollak, "Bargaining and Distribution in Marriage", in The Journal of Economic Perspectives,Vol. 10, No. 4, Fall 1996, pp. 139-158.

Shelly Lundberg, Robert Pollak and Terrance Wales, "Do Husbands and Wives Pool Their Resources?", The Journal ofHuman Resources, Vol. 32, No. 3, 1997, pp. 463-479.