Relational Contracts, Taxation and the Household

Patricia Apps () and Ray Rees

CESifo Economic Studies, 2011, vol. 57, issue 2, 245-258

Abstract: This article applies the theory of relational contracts to make precise the idea that because households are engaged in a repeated non-cooperative game, Pareto efficient outcomes can be supported by self interest, given the specific pattern of specialization and exchange that exists in the household. The household's choice of a particular solution from the resulting feasible set is found by the maximization of a household welfare function, a generalization of a suggestion originally made by Samuelson. This nests as special cases the objective functions used in currently popular models of households engaged in one-shot cooperative games. We take a specific example of such a household welfare function, characterize the determinants of the household utility distribution, and then apply the model to examine the effects of a move from joint to individual taxation. We show that on standard stylized facts, secondary earners are always better off absolutely, and define the conditions under which they will also be relatively better off. This confirms the conclusions from models that concern themselves only with the across-household welfare distribution. (JEL Codes: D11, D13, H21, H24, H31, J12, J16, K36, N30) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Date: 2011
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Working Paper: Relational Contracts, Taxation and the Household (2009)
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