Are households Pareto efficient? A test based on multiple job holding

Abstract

The collective household model requires that household decisions result in Pareto efficient outcomes. While this assumption is falsifiable, these tests are often difficult to implement due to data limitations or insufficient statistical power. We identify a novel setting—multiple job holding—where these issues are less of an obstacle. Using data from Bangladesh, we estimate the labor supply of households where members are engaged in multiple occupations and use the parameter estimates to test the collective model. We are unable to reject Pareto efficiency, but do find evidence against the unitary model. The results support the use of the collective model as a framework to study the inner workings of the household.