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Empirical Economics

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22-08-2016

The impact of targeting policy on spouses’ demand for public goods, labor supplies and sharing rule

Author: Panayiota Lyssiotou

Published in: Empirical Economics | Issue 2/2017

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Abstract

This paper studies the impact of targeted unconditional cash transfers on the spouses’ demand for public goods, labor supplies and sharing of resources. We estimate a collective labor supply model with distributional factors which is extended to include preferences over marketable public goods (including child goods). In this way, unlike previous research, we consider the impact of such transfers on the intrahousehold allocation of resources and distinguish between the labeling and recipient effects. We exploit the UK experience and find evidence in favor of the collective model with separable preferences over labor supplies and public goods. This finding implies a recipient effect and not a labeling effect of child benefits. Given the household’s unearned income, the bigger the wife’s bargaining power, the more the resources allocated to public goods (including child goods) and the wife’s private consumption. The results can be useful in the design of family policy which aims to improve the relative welfare of children within the family and alleviate any intrahousehold consumption inequalities.

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Such programs are also called ‘tagging’ or ‘indicator targeting’ because benefits are keyed to a characteristic of the family, such as the number of children, which is highly correlated with the characteristic of interest, such as child poverty (Akerlof 1978).

Chiappori et al. (2002) used as distributional factors the conditions in the marriage market, represented by the sex ratio and the rules governing divorce, and examined whether they affect the individual labor supply behavior of the two spouses and the decision process within the household. They found the effects to be sizable and in the direction predicted by the collective model.

For a number of years, the literature on targeting schemes developed independently from the literature on intrahousehold allocation. It is only recently that their interaction has been recognized (Haddad and Kanbur 1992).

This provides a test of the Pareto efficiency condition that must hold within the general collective model of labor supply. Pareto efficiency is a sensible assumption to make when spouses know each others preferences well and has been confirmed by empirical research, including Bobonis (2009). The model also nests models based on cooperative bargaining at least under symmetric information.

The indirect individual utility functions for the above labor supplies are given by Stern (1986) and Chiappori et al. (2002).

Thereafter and until 2000, when tax credits for parents were introduced, the increases in the child benefit rates were very small.

Since our emphasis is to allow for public goods in the collective model and evaluate the impact of targeting policy on the sharing of household resources, we do not incorporate the decision to participate in the labor market in order to avoid complexities. Donni (2003) and Blundell et al. (2007) addressed this issue. However, we acknowledge that this may lead to selection bias which may bias parameter estimates due to correlation of key independent variables and the disturbance terms. There is some evidence that selectivity bias may not be a problem (Mroz 1987). This approach was also adopted by Chiappori et al. (2002) who restricted their sample to households where both spouses supply positive hours of work.

Similar estimates are obtained when the whole sample of households, with both parents supplying positive hours of work, is used. Further restrictions on the wife’s minimum number of working hours decrease significantly the number of observations and affect the significance level of some parameters.

The base period is taken to be the first quarter of 1991.

Housing includes expenditure on central heating repairs, central heating installed, house maintenance, property transaction.

Chiappori et al. (2002) followed Mroz (1987) and used as additional instruments the second-order polynomial in age and education, father’s education, religion and city size to instrument wages, nonlabor income, number of preschoolers and school age children. Based on Hansen’s test, they did not reject the validity of the instruments and overidentifying restrictions.

Higher values of adjusted \(R^{2}\) purportedly indicate stronger instruments and instrumented variable estimators exhibit less bias when the instruments are strongly correlated with the endogenous variable. However, when looking at the adjusted \(R^{2}\) it can be misleading if the endogenous regressors are strongly correlated with the included exogenous variables but only weakly correlated with the additional instruments. In order to save space, the first-stage estimates and F-test statistics are not reported but are available from the author upon request.

We also experimented with narrower definitions of G, and the estimates are very similar. The unconditional specification is also estimated by decomposing the expenditure on public goods into its two main components (children’s clothing and fuel light and power and housing) and having two expenditure equations at the first stage of allocation. Again the estimates are very similar and are available from the author upon request. Finally, the unrestricted customary specification assumes public goods to be exogenous to the spouses’ labor supply decisions and affect them only through a substitution effect.

They are obtained with the estimate command of the SAS proc model procedure which is based on the delta method.

The effect of each of the two distributional factors is measured relative to the effect of the share of the husband’s unearned income in the household’s unearned income which is set equal to zero.

Similar wage elasticity estimates were found by other studies based on alternative estimations. Using US data, Chiappori et al. (2002) reported own wage elasticities for the wife’s hours of work around 0.23 and Eissa (1995) 0.6. Using UK data, Blundell et al. (1998) found positive but very small wage elasticities for wife’s hours of work. Chiappori et al. (2002) also found the husband’s own and cross-wage elasticities to be negative but very small.

This result is in line with the finding of Schultz (1990) in the case of Thailand.

\(\bigtriangleup G=0.251+3.463(10)(0.0093)-3.463(10)(0.0044)=0.42; \bigtriangleup s_\mathrm{f}=0.466(0.59)+5.238(10)(0.0093)-8.669(10)(0.0044)=0.38.\)

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Title: The impact of targeting policy on spouses’ demand for public goods, labor supplies and sharing rule
Author: Panayiota Lyssiotou
Publication date: 22-08-2016
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 2/2017
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-016-1134-0

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