Endogenous household formation and inefficiency in a general equilibrium model

The main purpose of the paper is to show that the process of household formation in a competitive market does not necessarily lead to outcomes that are efficient at the economy level, even assuming that members of each household take efficient collective consumption decisions. To this end, we consider a generalization of the Arrow-Debreu exchange economy model in which endogenous household formation is introduced, we assume efficient household decision processes, and we show that if there are many households which can potentially be formed, then there is a not negligible set of economies admitting inefficient equilibrium allocations.