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Introduction

Applying economic concepts to the family means letting go—if only temporarily—of the romantic ideal that so many place on marriage and parenthood. Families are collections of individuals, and one of the basic assumptions of neoclassical (or traditional) economics is that individuals behave selfishly. Economists even view purportedly unselfish behavior, such as giving money to charity, as accomplishing underlying selfish objectives, such as making people feel good about themselves. To economists, families are collections of self-interested individuals working together and sometimes competing for scarce resources, and who gets what can be a source of great conflict. There is a zero-sum game at play with regard to many decisions, and there is the chance that some family members will free-ride on the generosity or goodwill of their parents, siblings, or children. This view is disconcerting, however, and economists and other social scientists avoided studying these topics through the first half of the twentieth century. As sociologist David Heer pointed out in 1963, “although anthropologists gave us good descriptions of the power structure among the Hopi or the Tikopia, in the study of the contemporary American family, research on decision-making was conspicuous by its absence. The reason for this neglect is not completely clear; it may have reflected a fear that to inquire into the power structure of the American family was to deny the ideology of romantic love which insists that for the happily married pair the only concern of each is the welfare of the other.” 1

If the economic view of families as collections of selfish individuals can come across as somewhat unfeeling, the economic perspective on the role of families in society is warmer, if a little bit functional. Families are the vehicles for tremendous investments in people, in business enterprises and in communities. Economic value is created in well-functioning family systems in ways that make everyone in society better off. (And the destructive legacies of dysfunctional families have economic consequences as well.) Families are small economies unto themselves, the cellular building blocks of the larger economy, evolving over US history as the greater economy has evolved. Families determine the composition of the US labor force, the quantity of savings available for investment, and the distribution of consumer spending which drives the economy. The microeconomic decisions families make—who gets educated and how much, who works, who raises the children, who takes care of elderly family members, when to bail out kids, siblings, or others in economic crisis, whether to buy a car, or to go on vacation—shape the macroeconomy. Families have a fundamental resource allocation function which is often most starkly perceived when relationships break down, and resources are withheld from spouses, children, or siblings, or when feelings are bruised by perceived inequalities in financial and other support. This resource allocation function is an undercurrent that flows through the entire economy, and in trying to manage the economy, policy-makers move levers that cause families to allocate their resources in certain ways, as the examples in Chapter 1 illustrated.

In the development of modern economics, however, families have gotten short shrift. Economists have tended to ignore families and focus on individuals, probably because individuals are easier to contemplate, and simpler to portray in models of economic behavior. The vast majority of Americans, however, live and share resources with at least one other person, and even those who live alone often have economic ties to extended family members. Few individuals are today, or were in the past, independent economic actors, so understanding the economic functions of the family is critical, and having some basic ideas—or models—about how these functions are fulfilled and how decisions are made is fundamental to policy analysis.

Recognizing this, economists of the latter half of the twentieth century began incorporating families into their models. They did so in sometimes clumsy and coldhearted ways, however, and the neoclassical economist’s perspective on family is objectionable to many. Take how economists view the decision to have children. Article titles such as “Are Children Really Inferior Goods?”, 2 published in 2010, seem to say it all both in terms of how economists perceive children and what people dislike about economists. The title of that article could be rewritten as “Do People Have More Children During Tough Economic Times?”, which avoids the implication that children are market goods, but economics as a discipline has incorporated the family wholesale into models of demand and supply in ways that require some interpretation for the layperson. Interpreting these models is worthwhile, however, and the main objective of this chapter is to do just that.

The economic perspective—coldhearted as it may seem—is vital in understanding the effects of policy. For example, the economic portrayal of the “demand for children” incorporates the costs and benefits of children. Children in developed economies today are considered a net economic liability, although in the preindustrial United States, this would not have been considered so. 3 People have more children when children are cheaper to care for and raise, all else equal, so governments in developed economies seeing net population decreases, such as Japan and many countries of Western Europe, could take policy measures to make raising children cheaper, through child subsidies, universal day care, and low-cost higher education. Without understanding the economics, policy-makers who are interested in stabilizing population declines might ignore valuable tools for helping families afford more children. Conversely, in countries where population growth is a concern, requiring education for all children, particularly girls, and enforcing child laborlaws  are just two policies that result in children becoming more expensive, thereby encouraging smaller families.

Judging from the reactions of students in undergraduate economics classes, however, many people get extremely uncomfortable talking about the family in economic terms, and they may not think the government has any business taking steps to influence people’s decisions regarding fertility or any other family matter. But whether they care to think about it or not, families are as subject to the basic principles of economics as individuals, and even if policy-makers do not take an active role in encouraging family decisions such as to have more children or fewer, for example, they will inadvertently cause such results if they make policy without considering family economic responses.

As we consider the economic functions of the family in US economic history, and describe some simple models of family economic decision-making, one basic assumption we will rely on is that nineteenth- and twentieth-century families operated on similar economic principles as twenty-first-century families. They were concerned with providing food and shelter, educating children formally or informally, saving and investing for future goals, providing help to extended family and insuring against the inevitable hard times and old age; all these are consistent family objectives throughout time. Decisions about how to accomplish these goals may have been determined by a paternal or maternal family head—probably more common in the past—or some sort of collective decision-making or bargaining may have taken place between spouses—probably more common today. Different generations had to negotiate who does what, who gets what and who cares for whom when it came to taking on caregiving or breadwinning responsibilities and sharing economic resources across the generations, and this is true today as well.

While the basic economic functions and decision-making processes of the family have stayed relatively consistent over time, the context in which families’ economic decisions are made has changed dramatically. Not only has industrialization and the development of a consumer economy obviated the need for families to produce their own food, clothing, and shelter, but the policy environment in which they live has changed dramatically. The services provided by local, state, and federal agencies have evolved over time, particularly affecting education, housing, safety net services such as nutritional and medical support for low-income families, and retirement. Laws and regulations of all types have evolved, affecting how people treat their children, perhaps requiring them to purchase health insurance, increasing the likelihood that parents will be absent due to incarceration, determining where families can and cannot live and what they can and cannot do with their homes and property. Laws such as state-level divorce and alimony laws and federal gay marriage laws have changed the power structure in spousal relationships in ways that affect economic decision-making. The social expectations and norms established by the communities with which families identify and in which they live have also experienced sweeping changes, evidenced by the changing norms around marriage and non-marital childrearing.

This text will examine how families have responded economically to many of these changes. Before delving further into the family as an economic entity, however, it makes sense to ask, what are we calling a family? What defined a family in the past and what defines one today? Does the definition even matter?

Defining Family

For the purposes of economic analysis, the third question is the easiest, and the answer is no, no formal definition of family is necessary. If a group of people say they are a family through bonds created by biology, laws, love, friendship, or other obligations—and if they share their resources in any way—economists can analyze their exchanges of money, time, goods, and services using tools of family economics. Interestingly, an idea of family independent of biology or marriage is somewhat compatible with a historical definition of family elaborated by the US Department of the Interior for the 1860 census, over 150 years ago:

By the term ‘family’ is meant either one person living separately and alone in a house, or a part of a house, and providing for him or herself, or several persons living together in a house, or part of a house, upon one common means of support and separately from others in similar circumstances. A widow living alone and separately providing for herself, or 200 individuals living together and provided for by a common head, should each be numbered as one family. 4

In the 1860 census, it was living together, not the particular relationships between those living together, that defined a family, except in the case of slaves whose families were not recognized and who were enumerated only as the property of an individual. 5 Compare this to the 2010 census definition of “family”:

A family consists of a householder and one or more other people living in the same household who are related to the householder by birth, marriage, or adoption. 6

This modern definition reflects the evolution of public policy, which often emphasizes and requires a legal recognition of familial relationships, most commonly marriage and parental ties (although these can be assigned to adoptive parents or guardians). Rights and responsibilities maintained by law over family relationships usually govern only these two fundamental relationships. Other family relationships, such as those with siblings, cousins, grandparents, cohabiting partners, and even stepchildren, are usually not touched by family law or public policy in a direct way. This does not mean that policies do not indirectly affect these other types of family members. For example, Social Security and Social Security Disability Insurance only provide money directly to retired workers and their spouses, and disabled people or their parents, children, or guardians. Indirectly, however, the money Social Security provides has ripple effects across far-reaching family networks. Many grandchildren of elderly people, and able siblings of disabled people, have been helped by being relieved of some of the financial responsibility that loyal and supportive family members take on for their loved ones, regardless of any legal requirement of financial support. Any policy that provides resources to individuals, or takes resources away from individuals, can indirectly affect all those with whom that individual has an economic relationship.

So, while at times the legal definition of family that applies to a particular policy may take precedence, for the purposes of considering family economics in this book, a family is any group of people that define themselves as such, particularly if the family relationships involve sharing or potential sharing of economic resources—of money, time, goods, or services. Married or cohabiting heterosexual or homosexual partners, biological, step-, or adopted children, extended family, and friends with economic ties both perceived and actual—all these categories of relationships fall under family.

The Economic Functions of Family

What follows is a non-exhaustive list of economic functions fulfilled by family and potentially influenced by public policy.

Creating Human Capital

Human capital refers to the skills, abilities, and productive capacity of individuals, and it is most commonly associated with education and work experience. First and foremost, however, human capital is created within families. Families produce children and then invest money, effort, and time in their children’s health, education, and social development, all of which lead to skills and abilities that are valued in the home and the market. Historically, homes often served as classrooms and vocational schools for children, with parents passing on literacy, numeracy, and on-the-job training in agriculture, trades, and business. While in the modern era parents may not directly school their children, the homeschooling movement is growing in the United States, and the willingness of parents across the socioeconomic spectrum to supplement their children’s schooling with tutoring, music lessons and sports—requiring significant investments of time and money—demonstrates the importance modern families place on this responsibility. Even in utero, human capital formation is underway, with some women consciously eating, taking vitamins, giving up alcohol, and even listening to classical music or foreign language recordings in the hopes not only of producing a healthy child, but one that might be a little bit smarter, or a little bit ahead of its peers.

Besides creating human capital, families “assign” human capital to the labor force and ultimately determine its composition. Families decide who participates in market work, and how much time its members spend in market work versus household production. A child’s education and trade are also decisions that affect the labor pool in local communities, and parents across the socioeconomic spectrum have determined what their children will do for a living. One study of very poor families in antebellum Charleston, South Carolina, who had been forced by economic circumstances to leave their children in orphanages, showed that even in the most deprived circumstances, the mothers in particular made heroic efforts to instill literacy in their children and get them placed in apprenticeships, despite having relinquished custody of them. 7 In this way, even impoverished parents influenced their local economy by deciding in what trade their child would contribute his or her labor. Families also decide where and when to migrate and thus change the labor force composition of the United States across its geographies.

Creating Social Capital

Social capital refers to connections with extended family members, neighbors, church, and civic associations that create valuable social and economic networks and allow a community to function effectively. Creating social capital requires an investment of time, labor, or money, which implies tradeoffs with other uses of family resources. In many families, the paid work of some of the members helps support the unpaid work of other members, enabling stay-at-home parents, for example, to volunteer. This unpaid work often provides economically vital services that build community infrastructure. Consider, for example, all the service projects undertaken by youth and civic organizations, community food pantries run by churches, and parent–teacher associations which provide extra materials, enrichment programs, and free parent labor to schools. Families give up time and often money to participate in these organizations which support the civic life of many communities.

Household Production

The mix of goods and services produced within households has changed over the last two centuries, but the overall economic impact continues to be substantial. In the 1800s, growing food, sewing clothes, and constructing a house and furnishings were all vital productive activities for families, particularly in farm and frontier life. Specialization and exchange existed within families, so that not all members had to participate in all activities, but could gain proficiency or comparative advantage in some types of production and thus advance the overall economy of the household. While household goods production took a serious decline with industrialization in the mid- to late-nineteenth century, even today there are farm families and family businesses of all sorts that engage in production. The production of household services, on the other hand—the cooking, cleaning, childcare, healthcare, home maintenance, repairs, laundry, and shopping—continues to this day, even though market-based substitutes are increasingly available to families with means. 8

How important is household production? While the best method of valuing the contribution of these services to the US economy is subject to debate (and is discussed later in Chapter 5), one method is to consider the price of paying someone to come into a home and cook, clean, or care for the elderly, for example, and value the time that family members spend doing these tasks accordingly. One estimate using this method demonstrates that adding the value of these services to our national accounts would increase GDP by about 18%. 9 This does not include the value of household production as a complement to market work—not only do unpaid services have a value in and of themselves, but they increase the productivity of the members of the household that work in the market.

Creating Economies of Scale and Providing Public Goods

Many of the goods and services that households purchase or otherwise provide their members benefit from economies of scale, meaning that it is cheaper per person to provide these goods for many people than for few. For example, it is cheaper in terms of time required per meal to cook dinner for four people than for one, and it is often cheaper per meal to purchase the ingredients and the cooking fuel for four as well. As many recent college graduates know, renting a two-bedroom apartment is rarely twice the cost of a comparable one-bedroom apartment, so getting a roommate takes advantage of economies of scale in housing. Sometimes these economies of scale for families result from pricing policies, such as family memberships at gyms, for example, that are cheaper on a per person basis than individual memberships.

In a similar way, much of household production and consumption falls into the category of public goods. Public goods are those goods that are nonrival, meaning one person’s use of them does not preclude another person’s use, and nonexcludable, meaning you cannot prevent someone who has not paid for the good from using it. A perfect example is heating a home. Once heating oil is purchased and heat is produced, the enjoyment of that heat can benefit anyone in the home (without lessening anyone’s warmth) and no one can be prevented from enjoying the heat, even if they did not contribute to purchasing the oil (without locking them out of the house). The intangible benefits gained from children are often considered public goods. One parent’s enjoyment of their children’s presence, development, or accomplishments does not usually preclude the other parent’s enjoyment—the satisfaction resulting from hearing of a child’s good report card cannot be “used up.” It can be difficult to persuade individuals to purchase or invest in public goods because they are subject to a free-rider problem, meaning that those who do not pay for the goods are able to enjoy the goods anyways. Families, however, are uniquely tolerant of free riders and often find ways to make them pay up. Families help solve the problem of the underproduction of public goods in this way—by providing the goods even when someone is free-riding, and enforcing contribution to such goods.

Consumption and Savings Decisions

Crucial spend-or-save decisions power both consumption and investment, determining how much firms must produce to satisfy consumers’ wants and how much financial capital firms can access from individual savings. On the family level, these decisions can include significant tradeoffs between the well-being of the family today, and its well-being in the future. For example, parents often face a daunting choice between saving for retirement and paying for their children’s college education, testing both their optimism regarding the economic conditions they will face in their old age, and their altruism toward their children. They can borrow from their future, to finance current consumption and current ventures such as starting a new business. They can be saddled by decisions made in the past, when they acquired debt. The consequences of trends in intertemporal (across time) allocation of resources—the consume versus save decisions—affect the entire economy. For example, the willingness of US families to purchase on credit creates unique macroeconomic conditions when compared with those in other countries, such as China, where families opt toward savings. Another example are the college financing decisions students and their families are making, resulting in a significant educational debt from college, which may impact the housing market by hampering the ability of young adults to afford a mortgage.

Consumption and savings decisions can entail difficult bargaining within households. Couples have to decide what to purchase, when to purchase, and how to finance purchases. They decide where to invest their money and what level of risk they are willing to assume. They also allocate money for food, education, healthcare, clothing, and other consumption goods within the family, which are sensitive and critical decisions when it comes to children. Studies show that, on average, mothers are more willing than fathers to spend on children in ways that improve their health and other measures of human capital. 10 For this reason, countries that provide child allowances in the form of cash transfers usually stipulate that the money is deposited in mothers’ bank accounts instead of fathers’.

Risk-Sharing and Self-Insurance

Families share risk among their members and insure each other in a wide variety of ways. When multiple family members are employed, for example, the layoff of one does not necessarily spell disaster, because others have an income. In a phenomenon known as the added worker effect , some family members are pulled into the labor market by a recession when a spouse or a parent loses a job, so the work potential of some members insure the family from hardship. Families can subsidize the startup efforts of an entrepreneur and thus share in the risk, either by investing directly, or providing housing or simply a back up source of financial help if the business does not go well. In recessions, families often double up in housing. 11 Geographically extended families can also be sources of informal insurance against regional economic downturns, crop failure, or natural disasters, by either loaning money or supporting the migration of family members to a new region. In the United States and other Western economies, parents in particular provide aid to children in economic need. There is even a theoretical case to be made that families can provide insurance more efficiently than commercial providers because they have better knowledge of the circumstances and the risk levels of their members than commercial providers have, and they can police their members for risky behaviors or shirking.

Three Economic Models—Three Assumptions About Decision-Making

So, with this wide variety of economic functions to fulfill, how does a family organize its economic decision-making? How does the allocation of scarce dollars for consumption, human capital investment and saving—not to mention the allocation of scarce time for family and home-based work versus market work—get determined when a variety of individuals may be clamoring for their preferences to take precedence? How does a family achieve the neoclassical economist’s objective of maximizing household utility when a family is made up of individual actors whose ideas of maximizing the family utility may be very different?

The answer to these questions is complex, but a few simple models have emerged since economists started to look at families and households as more than just black boxes who shared one agreed upon set of preferences and pooled all their income—essentially equating them with individuals. The first model, which we will term altruism and which is also called the unitary model of household decision-making , is based on the idea that family economic decisions are decided by a single person, the family head, who behaves altruistically toward the other members in allocating family resources. The second model is a bargaining model , which is especially applicable to the case of partners in a marriage or marriage-like relationship who may bargain with each other in order to achieve agreement when they have different preferences over how they spend their joint resources. The third model is the exchange model, pertinent, especially to relationships between the generations in a family, whereby a parent, for example, invests in a child with the understanding that in the future that child will provide some return in income or services to the parent. Let’s examine a little more deeply what kinds of decision-making behavior these models represent and how they will help us understand the impact of policy on families.

Altruism

The first model used in modern family economic analysis was developed by Gary Becker in the 1960s. It features only one household member’s preferences—those of the household head—but those preferences recognize and include the wants and needs of all family members. The intuition behind the model is simple: as long as the head of the household is altruistic, meaning he or she cares about the well-being of other members of the household, that person will incorporate the other members’ well-being into their decision-making, allocating resources, and making tradeoffs between the wants of family members to maximize collective welfare. In his seminal work, A Theory of Social Interactions (1974), Becker defined the main actor in his economic models of the family:

The “head” of a family is defined not by sex or age, but as that member, if there is one, who transfers general purchasing power to all other members because he cares about their welfare.

One might assume that the head is the chief breadwinner, but maybe not. Maybe the “headship” is comprised of a couple who are in complete alignment on their priorities and desired outcomes, so they agree more or less on all decisions. Or, maybe the head is the spouse or parent of the breadwinner, and the breadwinner’s earnings are handed over to this person to be allocated to the needs of the family as he or she sees fit. In any case, it is assumed that the head knows the needs and wants of all the family members. When a parent or spouse “transfers general purchasing power” to another family member because he or she cares about their welfare, economists identify this as an example of altruism . In economic terms, altruism implies that one person’s well-being, or utility, is increased by the utility of another. An altruistic husband suffers intrinsically when his wife is unhappy, not due to any actions of hers but because he wants her to be happy. An altruistic mother will feel happier when her child is happy, not because an unhappy child’s behavior affects her (though it might), but because her child’s state of unhappiness causes her distress. In Becker’s model, the person whose happiness matters most, however, is the family head who controls the resources. That person may be very altruistic, or very selfish, but as the controller of the resources that is his or her prerogative. 12

It is probably not a coincidence that the single economic head assumed in the first family economic models of the 1960s resembles the benign patriarchs of Father Knows Best, Leave it to Beaver, and other media portrayals of the post-World War II American family. The ideal of the nuclear family, with a working father and a homemaking mother, was at its peak, even though it was never as ideal or as prevalent as many believe, 13 so the altruism model may work well in considering policies during that timeframe and in earlier US historical contexts when married men legally did control all the economic resources.

The altruism model is also very useful for depicting the allocation of resources from parents to children. The balance of power between parents and children is clearly tilted toward the parents. Children have to accept the economic decisions of their parents and have little recourse to bargaining—although they may try. Many economists who study the flow of resources from parents to children, or from children to parents, rely on an altruism model because the assumption that parents gain utility or satisfaction from their child’s well-being seems to reflect well why a parent would invest any resources at all in a child that they may never receive any economic return from. And one great benefit of the altruism model, whether it is used to model economic relationships among spouses, parents, children, or extended family is that it provides the best economic proxy for a well-known familial phenomenon—love.

Bargaining

Decision-making in many families may be more shared than the altruism model suggests. Many sociological surveys of family decision-making and family power structures in the 1950s and 1960s asserted a shared decision-making process, albeit one tilted toward male dominance. 14 Studies in the marriage and family literature during this timeframe, while highly critiqued on the basis of methodology, tended to find a positive relationship between the economic resources brought to marriage by each spouse, in the form of relative earnings, occupational status, or education, and his or her decision-making power. 15 A related idea was that a spouse’s influence on decision-making related positively to the value of their potential resources if the marriage were to end, explaining why some studies found that women’s influence in decision-making declined while their children were young and they would be less able either to work or to attract another mate, and increased after children were grown. 16

The relationship between control of economic resources and relative power in decision-making suggests that spouses are bargaining. Negotiation and compromise are basic elements of many marriages and marriage-like relationships—when spouses differ in how they would like to spend their money, for example, they work toward a result that they can both find satisfactory even if it is not their individual ideal. If they are unsuccessful, general unhappiness could result, or in many cases the result could be an end to the relationship and divorce. Particularly if one or both of the spouses could potentially achieve greater satisfaction outside of marriage—by having undisputed control over their own paychecks, for example, or access to a good alternative selection of potential mates—the threat that a partner could leave may loom large for at least one of the spouses, leading him or her to make more concessions.

Economists such as Marilyn Manser, Murray Brown, Marjorie McElroy, and Mary Jean Horney developed models in the late 1970s and early 1980s that borrowed heavily from game theory to model bargaining outcomes in families. Bargaining models  applied to buyers and sellers feature the preferences of each party, their relative power levels (say that one is a skilled negotiator and the other is inexperienced in bargaining), and a threat point, or outside option, which is the outcome each party realizes if they walk away from the deal. In “cooperative bargaining” models applied to spouses, the couple bargains over the allocation of family resources, with the outcome depending upon (1) each partner’s level of altruism toward the other, or how much they are willing to sacrifice for the other’s happiness, (2) their relative degree of power in the relationship—is one able to credibly threaten violence against the other, for example, and (3) their threat points, which reflect the outcome each would achieve if the relationship ended in divorce. In cooperative bargaining, spouses either find a satisfactory allocation of resources or the relationship ends.

Shelly Lundberg and Robert Pollak further developed the models to reflect how the outcome of such bargaining could be a non-optimal allocation of resources within the marriage, and not necessarily divorce. In “separate spheres” bargaining, couples might find an efficient allocation of resources together, or continue in the marriage with a non-cooperative and inefficient solution serving as the threat point. The non-cooperative allocation of resources would depend on the resources controlled by each spouse—their separate salaries for example—which they would decide to spend in part on their own consumption and savings, and in part on household public goods, such as housing or utilities. These public goods—those costs of living that are essentially cheaper per person for two than for one—might make it worthwhile to remain married even if the optimal allocation of resources between the spouses is not attained. A non-optimal solution, however, would not jointly maximize their well-being. 17

These models were timely, reflecting the changes in state laws governing divorce, and in changing legislative and judicial trends regarding alimony, child support and property settlements that gained momentum in the 1960s. Using these models, one could predict how a change in the generosity of alimony and child support settlements would affect the allocation of resources within marriage . Prior to enforced child-support and alimony arrangements, for example, the improvement in a husband’s own spending power that would result from abandoning his family could be enormous, even though it may be accompanied by severe social sanctions. This gave breadwinner husbands tremendous leverage in determining the allocation of resources within the marriage, because women would be much less likely to improve their economic situation through divorce even if their husband was very stingy. With the arrival of alimony and mandated child support, the husband’s improvement in spending power post-divorce would be relatively lower than before, and the mother’s situation post-divorce would not be so dire, making her more likely to have a credible threat of divorce, and him less likely to find divorce appealing. Thus, he would be willing to concede more, and share more generously within the marriage.

Bargaining models were not just used to determine how a family’s resources would be divided between husbands and wives. They were used to model spousal bargaining over how resources were allocated to the children as well. This is important for predicting how child well-being might change as a result of changes in child and family welfare policies. For example, if husbands and wives have control over their own resources within the marriage and do not simply pool their income, then a change in which parent receives a child allowance or welfare benefit can reverberate through the family. As mentioned above, in many studies it has been shown that financial transfers to mothers as opposed to fathers result in more spending on food, healthcare, and clothing for children. 18 The evidence for this is international in scope, and in many cases quite dramatic. In Brazil, for example, one study found that “unearned income in the hands of a mother has a bigger effect on her family’s health than income under the control of a father; for child survival probabilities, the result is almost twenty times bigger.” 19 What this means for family economics is that any policy change that puts women in more control of resources is likely, on average, to result in increased spending on children.

Bargaining models can account for shared decision-making in a way that altruism models cannot, which is particularly helpful in understanding the behavior of spouses. While the bargaining model could also be applied to bargaining between parents and children, particularly in earlier historical eras when children brought income into the home, 20 the altruism model is usually more apt for understanding the distribution of resources between parents and children. Another model that is helpful to understanding parent–child economic relationships is the exchange model.

Exchange

The third basic model to consider suggests that family members share resources with each other in exchange for something. This is one of those ideas that test our idealized notions of familial love, because outside the family, it is perfectly normal to discuss the exchange of money for goods and services, but inside the family it can seem a bit crass. People do not typically approve of parents paying children for them to behave well, to study or to help the parent out by doing chores or performing other services. Neither do we expect husbands and wives to pay each other for household work. Implicitly, however, that is often what happens. The exchange model recognizes that the money that flows through a family, particularly across the generations, can represent animplicit contract. Parents, for example, may give money to a child or invest in a child’s education with the understanding or hope that the child will reciprocate in some way when or if the parent makes a request or has an explicit need. 21 In the late 1980s, economists such as Donald Cox began developing exchange models of intergenerational transfer behavior, with a particular eye to old-age care for parents. These models are often intertemporal in nature, meaning they represent economic allocation choices between time periods. The parent invests in the child early in the child’s life, perhaps when the parent is very productive in the labor market, and reaps a payoff sometime in the future, during retirement, for example.

Exchange models can be used to explain why a parent gives more money to one child than to another during the parent’s lifetime, even though upon a parent’s death, bequests are most often given to all children equally. 22 The parent may be receiving more help from one child than another, or may be living with that child, or may expect that one child will provide more help as the parent ages than another. Exchange models can also be used to explain how families insure their members. An insurance function is fulfilled when one family member helps another, believing that if a future need arose, their help would be reciprocated.

It can be difficult to ascertain through data sources if families are operating under the principles of exchange, because of the implicit and often unspoken terms of the exchange relationship. What looks like a parent behaving altruistically today by giving money to a child may actually be a case of exchange because the parent has an expectation of some return of resources in the future. The intuition, however, is simple, and it is common for people to expect that a child who has been relatively more attentive to an elderly parent should receive more from that parent than his or her siblings receive, either during the parent’s life or after the parent’s death.

Public Policy and the Three Models

These three models—altruism, bargaining, and exchange—are broad enough to help us understand how a policy might affect some families, and not others. For example, back in the 1800s, in families where the bargaining model model was operative, and spouses jointly negotiated how money and time were allocated, coverture laws, and divorce laws limited a woman’s property rights and her ability to take her property or any resources out of a marriage. A woman’s threat point in the bargaining model was severely diminished by such a policy—her well-being would have been so low upon leaving the marriage that her ability to negotiate for more resources within the marriage would be weak—leading to less compromise required by the husband and the balance of resources tipping toward him. On the other hand, if the altruism model was operative, and resources were allocated by a paternalistic family head, then the woman’s ability to take property out of the marriage after divorce, and her potential well-being outside of the marriage would have made no difference to the allocation of resources within the marriage.

Another policy example would be that of welfare programs that provide transfers to unmarried mothers of young children. To a married male altruist who functions as the family “head,” such transfer policies have no bearing on the allocation of resources within the marriage. He gives because of theutility he gets out of seeing his family happy. But if bargaining based on a threat point is in play, then a woman with little or no skills and with young children could see her well-being inside her marriage increase due to awelfare policy that provides her an income if she leaves the marriage, improving her threat point. She has more credibility in her implicit or explicit threats to leave the marriage with this outside source of support.

A third example, pertaining to parents and children, is the implementation of an increase in Social Security benefits. An increase in future income can have positive or negative effects on investments in children, depending on whether altruism or exchange motivations are operative. Altruistic parents would take into account future benefits from Social Security by, perhaps, decreasing their own retirement savings and giving more to their children. On the other hand, for less altruistic parents whose investments in their children were motivated by exchange, parents who had previously anticipated being dependent on their children in the future might respond to newly implemented old-age benefits by decreasing financial transfers to their children prior to their own retirement. The policy of the government providing for the elderly would have lowered the need of parents to ensure the security of their retirement years by entering into an explicit or implicit agreement with their children to exchange money today for financial or other help by the children for the parents in the future.

Throughout this text, as we examine how different policies affected the resource allocation decisions of families, we will have to allow for some uncertainty in understanding whether altruism, bargaining, or exchange are the dominant models within any given family. But some public policies may actually have influenced family decision-making regimes at different points in US economic history. For example, state law which put the control of wives’ and children’s earnings and assets, even those inherited by the wife from her ancestral family, under the control of the husband and father would have reinforced the idea of a single paternalistic head of the family, as in the altruism model. At that time in US history, bargaining would probably have been a less plausible model for many families, even though it seems more realistic today.

On the other hand, the transition from divorce laws requiring the consent of both spouses to unilateral divorce with equal division of marital assets might push couples toward greater bargaining and more equal power in negotiating how money is spent and who does what within the household. (As well as helping to decrease the incidence of domestic violence and spousal homicide. 23 ) Changing societal norms and greater acceptance of divorce may have been the reason for changing divorce and property settlement laws, but these laws then reinforced the rise in female bargaining power. 24

The evolving interdependent relationships among family economic decision-making, social norms, and public policy from the nineteenth century through today mean that we will have to consider the regimes under which families were affected by policy as varying. References to altruism, bargaining, and exchange will be frequent in later chapters and it will be important to consider the assumptions regarding family decision-making that are being made in evaluating certain ideas about the impact of policy.

Conclusion

The economic functions of the family—defined as any group of people related by bonds of biology, love, friendship, or obligation who share or may potentially share economic resources—have been remarkably consistent over time. Many of the circumstances were different in the 1800s than today—industrialization was not as advanced, consumer goods were not as plentiful, and much more labor went into producing goods and services in the home. Financial services such as insurance were rudimentary, and the rights of women were less complete. But the economic roles of a family were similar. Families still had to work to provide for the physical needs of their members, educate, or train their children, keep everyone healthy, create a nest egg for old age or for bad times, and maybe help extended family members. They still had to save for big purchases, such as land and other real estate, home furnishings, and means of transportation. They needed to allocate their members’ time across a wide variety of tasks serving the family itself or its community, perhaps bartering time with other families when big tasks needed to be done. They also did not make decisions in a vacuum and the policies of their local, state, and federal governments, as well as social norms, would have influenced their resource allocations.

The economic roles of the family, as well as the altruism , bargaining , and exchange models described above will be a touchstone for some of the later chapters, so we can hypothesize about how different public policy applications might have changed family decisions. We will begin by looking at the most basic of family decisions—the decision whether or not to have children and how many children to have—and its consequences for the US economy.

Notes

  1. 1.

    David M. Heer, “The Measurement and Bases of Family Power: An Overview,” Marriage and Family Living 25, no. 2 (1963).

  2. 2.

    Jason M. Lindo, “Are Children Really Inferior Goods? Evidence from Displacement-Driven Income Shocks,” The Journal of Human Resources 45, no. 2 (2010).

  3. 3.

    Lee A. Craig, “The Value of Household Labor in Antebellum Northern Agriculture,” The Journal of Economic History 51, no. 1 (1991).

  4. 4.

    U.S. Department of the Interior, “Eighth Census, United States: Instructions to U.S. Marshals,” ed. Census Office (Washington, DC, 1850).

  5. 5.

    Slaves were enumerated as persons using numbers, not names, and defined in relationship only to their owner. The census instructions made very clear that enumerators were not to recognize or record marriages among slaves: “Under heading 6, entitled Married or widowed, this column only applies to free inhabitants. The spaces opposite all slaves are to be left blank.” In this way, the family status of most African Americans was officially denied by the federal government. Sorting out the marital status of freed slaves in the post-war south was a difficult and, for some, traumatic process as bizarre strategies were employed, such as declaring “married” any couple living together on a certain date. For more see Chapter 4 of Nancy F. Cott, Public Vows: A History of Marriage and the Nation (Cambridge, MA: Harvard University Press, 2000).

  6. 6.

    Daphne Lofquist et al., “Households and Families: 2010,” in 2010 Census Briefs (Washington, DC: United States Census Bureau, 2012).

  7. 7.

    John E. Murray, “Family, Literacy, and Skill Training in the Antebellum South: Historical-Longitudinal Evidence from Charleston,” The Journal of Economic History 64, no. 3 (2004).

  8. 8.

    Interestingly, this does not mean that fewer hours of home production are necessarily taking place. In fact, when one form of household service is substituted by a purchased service, often the time saved is applied to childcare, for example. See Suzanne M. Bianchi et al., “Housework: Who Did, Does or Will Do It, and How Much Does It Matter?,” Social Forces 91, no. 1 (2012); and Valerie A. Ramey, “Time Spent in Home Production in the Twentieth-Century United States: New Estimates from Old Data,” The Journal of Economic History 69, no. 1 (2009).

  9. 9.

    J. Steven Landefeld, Barbara M. Fraumeni, and Cindy M. Vojtech, “Accounting for Nonmarket Production: A Prototype Satellite Account Using the American Time Use Survey,” U.S. Department of Commerce (Bureau of Economic Analysis, 2005).

  10. 10.

    Shelly J. Lundberg, Robert A. Pollak, and Terence J. Wales, “Do Husbands and Wives Pool Their Resources? Evidence from the United Kingdom Child Benefit,” The Journal of Human Resources 32, no. 3 (1997); Shelley A. Phipps and Peter S. Burton, “What’s Mine Is Yours? The Influence of Male and Female Incomes on Patterns of Household Expenditure,” Economica 65, no. 260 (1998); Catherine T. Kenney, “Father Doesn’t Know Best? Parents’ Control of Money and Children’s Food Insecurity,” Journal of Marriage and Family 70, no. 3 (2008); and Duncan Thomas, “Intra-Household Resource Allocation: An Inferential Approach,” The Journal of Human Resources 25, no. 4 (1990).

  11. 11.

    Greg Kaplan, “Moving Back Home: Insurance against Labor Market Risk,” in Staff Report (Minneapolis: Federal Reserve Bank of Minneapolis, 2010).

  12. 12.

    Gary S. Becker, A Treatise on the Family (Cambridge, MA: Harvard University Press, 1991).

  13. 13.

    Stephanie Coontz, The Way We Never Were: American Families and the Nostalgia Trap (New York, NY: BasicBooks, 1992). Chapter 2.

  14. 14.

    Lee G. Burchinal and Ward W. Bauder, “Decision-Making and Role Patterns among Iowa Farm and Nonfarm Families,” Journal of Marriage and Family 27, no. 4 (1965); Heer, “The Measurement and Bases of Family Power: An Overview”; and Constantina Safilios-Rothschild, “The Study of Family Power Structure: A Review 1960–1969,” Journal of Marriage and Family 32, no. 4 (1970).

  15. 15.

    “The Study of Family Power Structure: A Review 1960–1969”; “Answer to Stephen J. Bahr’s, “Comment on ‘The Study of Family Power Structure: A Review 1960–1969’”,” Journal of Marriage and Family 34, no. 2 (1972).

  16. 16.

    Heer, “The Measurement and Bases of Family Power: An Overview.”

  17. 17.

    Shelly Lundberg and Robert A. Pollak, “Separate Spheres Bargaining and the Marriage Market,” Journal of Political Economy 101, no. 6 (1993).

  18. 18.

    Lundberg, Pollak, and Wales, “Do Husbands and Wives Pool Their Resources? Evidence from the United Kingdom Child Benefit”; Phipps and Burton, “What’s Mine Is Yours? The Influence of Male and Female Incomes on Patterns of Household Expenditure”; Kenney, “Father Doesn’t Know Best? Parents’ Control of Money and Children’s Food Insecurity”; and Thomas, “Intra-Household Resource Allocation: An Inferential Approach.”

  19. 19.

    “Intra-Household Resource Allocation: an Inferential Approach,” Journal of Human Resources 25, no. 4 (1990).

  20. 20.

    Carolyn M. Moehling, ““She Has Suddenly Become Powerful”: Youth Employment and Household Decision Making in the Early Twentieth Century,” The Journal of Economic History 65, no. 2 (2005).

  21. 21.

    Donald Cox, “Motives for Private Income Transfers,” Journal of Political Economy 95, no. 3 (1987); and Donald Cox and Mark R. Rank, “Inter-Vivos Transfers and Intergenerational Exchange,” The Review of Economics and Statistics 74, no. 2 (1992).

  22. 22.

    Audrey Light and Kathleen McGarry, “Why Parents Play Favorites: Explanations for Unequal Bequests,” The American Economic Review 94, no. 5 (2004); Mark O. Wilhelm, “Bequest Behavior and the Effect of Heirs’ Earnings: Testing the Altruistic Model of Bequests,” The American Economic Review 86, no. 4 (1996); and Kathleen McGarry, “Inter Vivos Transfers and Intended Bequests,” Journal of Public Economics 73, no. 3 (1999).

  23. 23.

    Betsey Stevenson and Justin Wolfers, “Bargaining in the Shadow of the Law: Divorce Laws and Family Distress,” The Quarterly Journal of Economics 121, no. 1 (2006).

  24. 24.

    Jeffrey S. Gray, “Divorce-Law Changes, Household Bargaining, and Married Women’s Labor Supply,” The American Economic Review 88, no. 3 (1998).