Are Extended Families Efficient?

Patrick Coate, Duke University
Michael Dalton, Duke University

This paper utilizes the structure of the data from the PSID to estimate the role of the extended family in the decision process of a household. The paper examines how the resources of specific members of the extended family outside of the household affect the spending patterns of the household. Next, the paper tests for Pareto efficiency of the extended family in the way that resources are shared between households of the same family. Lastly, the paper analyzes how the role of the extended family changes depending on one's place in the life cycle. We find that, even when accounting for fixed effects across the family, the resources of the family play a significant role in housing and education expenditures. The results show rejections of Pareto efficiency that suggests that there is an element of strategy in the decision process of the household outside the realm of the static model.