Are Intrahousehold Allocations Efficient? Evidence from Monte Carlo Simulations

Models explaining household decisions assume that the member’s bargaining process, although unknown, leads to efficient outcomes. The empirical literature has not been able to reject this hypothesis when tested in several datasets, including those from poor, rich and emerging countries. This paper presents Monte Carlo simulations to show that the methods used for testing are inadequate for two reasons. First, the performance of the test statistic, and in particular the Type II error, depends on the algebraic formulation of the restriction to be tested. Second, none of the formulations dominate the other alternatives. These two factors prevent us from concluding whether there is enough evidence supporting the assumption of efficient intrahousehold allocations. Alternative approaches to validate the test are discussed.