Is the Allocation of Resources within the Household Efficient? New Evidence from a Randomized Experiment

This paper studies whether households make Pareto-efficient intra-household resource allocation decisions. It sets out a new empirical test of the collective model that exploits exogenous variation in two distribution factors – variables affecting the resource sharing rule within households. Such variation is necessary to test the condition that consumption good demand responses are proportional to changes in the distribution of decision-makers’ resources. Combining randomized variation in women’s income generated by the experimental evaluation of the PROGRESA program in rural Mexico with general household income variation attributable to localized rainfall shocks, we find evidence favoring the Pareto-efficiency condition. More specifically, we find that female-specific income changes have a substantial positive effect on food expenditures and expenditures on children’s goods, whereas income changes due to rainfall shocks have a smaller influence on household public goods expenditures. The evidence is consistent with female partners having greater marginal willingness-to-pay sensitivity to own-income changes, and social norms which may oblige women to devote their earnings to meet collective consumption needs.