Pierre André Chiappori (Columbia) "Family Economics" - Cemmap

120 3. Preferences and decision making
in the usual sense that no other feasible choice would have been preferred
by all household members. This approach was originally suggested by Chiappori
(1988, 1992) and Apps and Rees (1988). Following Chiappori, we
refer to such models as collective and refer to households that always have
Pareto efficient outcomes as collective households. More specific representations,
based on bargaining theory, are briefly discussed at the end at this
section. In the remainder of this chapter we briefly introduce the collective
model. Chapters 4 and 5 expand on this discussion.
The collective approach relies on two fundamental assumptions. First,
there exists a decision process in the household and it is stable. Second,
this process leads to Pareto efficient outcomes. We discuss these aspects
successively.
3.5.1 Decision processes
A fundamental assumption in unitary demand theory is that individual
preferences are stable, in the sense of not changing capriciously from moment
to moment. This is not a logical requirement; in principle, the world
could be such that people are intrinsically inconsistent, and a person’s preferences
today are unconnected with those of yesterday. Clearly, in such a
world, very little could be say about individual behavior: a minimum level
of stability is necessary if we wish to make predictions based on our models.
Thesamerequirementappliestoany model aimed at describing the
behavior of a group. The notion of stability, in that case, must be given a
broader interpretation: it relates not only to preferences, but also to the
decision process. Again, the world could be such that a given household,
faced with the same environment in different time periods, adopts each time
adifferent decision process leading to different outcomes. And again, in such
a world not much could be predicted about household behavior. We rule
out these situations by assuming the existence of a stable decision process.
Formally, we define the fundamentals of the model as the preferences of the
members and the domestic technologies they can use. A decision process
is a mapping that associates, to given fundamentals and given vectors of
prices, incomes and factors that affect preferences and the decision process,
a probability distribution over the set of consumption bundles. Our first
basic assumption is thus the following:
Axiom 3.1 (Stability) Each household is characterized by a unique decision
process.
In words: there is a stable relationship between the fundamentals of the
model, the economic environment and the chosen outcomes. Note that, in
full generality, this relationship needs not be deterministic. It may be the
case, for instance, that in some circumstances the process will lead to ex-