What is the basic economic decision-making unit? Is it the household or
the extended family? This question is fundamental to economic analysis and
policy design. The answer given by the Life Cycle and Keynesian models is
that the economic unit is the household. According to these models, members
of particular households act selfishly and do not fully share resources with
extended family members in other households. Hence, altering the distribution
of resources across households within the extended family will alter the
consumption and labor supply of those households who acqUire or lose
resources. In contrast to the Life Cycle and Keynesian models, the altruism
model implies that the extended family is the basic economic decision-making
unit. According to this model the extended family is linked through altruism
and, as a result, acts as if it fully shares resources. In the altruism model
nondistortionary changes in the distribution of resources across households
within the extended family will have no effect on the consumption or labor
supply of any of its members.
Despite its importance, the boundaries of economic decision-making units
have not, to our knowledge, been examined directly with micro data. Stated
differently, the altruism model has not been tested against the Life Cycle and
Keynesian alternatives with such data. This paper uses matched data on
parents and their adult children, contained in the Panel Study of Income
Dynamics, to perform such a test. In essence our test asks whether the
distribution of consumption and labor supply across households within the
extended family depends on the distribution of resources across households
within the extended family.
Our findings provide quite strong evidence against the altruism model.
The distribution of resources across households within the extended family is
a highly significant (statistically and economically) determinant of the
distribution of consumption within the extended family. This finding holds
for the entire sample as well as the subsample consisting of rich parents and
poor children.
In addition to showing that the distribution of extended family resources
matters for extended family consumption, we test the life cycle model by
asking whether only own resources matter, i.e., whether the resources of
extended family members have no affect on a household's consumption. Our
results indicate that extended family member resources have, at most, a modest
effect on household consumption after one has controlled for the fact that
extended family resources help predict a household's own permanent income.
*Published:
American Economic Review, Vol. 82, No. 5, pp. 1177-1198, (December 1992).
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