Family Bargaining and Welfare

Recent research on household behavior suggests that, ceteris paribus, a woman’s "power" within a household influences consumption and time allocation choices. From an empirical point of view, a central stumbling block in this line of inquiry has been identification of sources of "power" that can plausibly be treated as exogenous. Aid to Families with Dependent Children, AFDC, was paid only to single women with children. The benefit level provides a natural fall-back for a low-income woman with children who is contemplating separation from her partner. As AFDC payments increase, separation will become more attractive and, we conjecture, the relative bargaining power of the woman in a household should also increase. If this is true, and if bargaining power does affect allocation decisions within the household, then the AFDC benefit level should affect household choices in intact families. This hypothesis is tested using the PSID from 1968 through 1992. Benefit levels, which (conditional on family size) vary across states and over time are treated as exogenous. In order to sweep out household-specific unobserved heterogeneity, models include household fixed effects. In addition, the model predicts the behavior of households with young children should be influenced by AFDC but not that of households with no children. Second, AFDC is unlikely to be paid to women in higher income households and so it should have a bigger influence on the behavior of lower income households. The results are consistent with these predictions. AFDC generosity does affect the allocation of resources in households with young children, and particularly lower income households with very young children. Corroborating evidence is drawn from the Consumer Expenditure Survey. We conclude that options outside marriage, as indicated by the generosity of AFDC benefits, affect bargaining power of women within marriage which, in turn, influences household resource allocation decisions.