Investment Decisions with Endogenous Budget Share Allocations Inside the Household

Abstract: We study the dynamic relationship between intra-household resource allocations and women’s investment decisions. We develop a signaling model in which the share of the household budget over which a woman has control is a function of the quality of her prior investment decisions. The model predicts that in order to maintain their access to the household budget, women who have difficulty assessing the returns to new goods or technologies tend to (a) under-invest in them and (b) knowingly over-use low-return goods in order to hide bad purchase decisions (we call this the intra-household sunk cost fallacy). We test the model through a series of experiments with married couples in Malawi, generating three main results. First, the key premise of the model holds: wives perceived to be good investors by their husbands receive more transfers, both observationally and experimentally. Second, women are willing to forego experimental earnings in order to avoid sending a bad signal to their husband, on both the extensive margin (under-investment) and the intensive margin (hiding mistakes). Third, women with a lower reputation capital under-invest in unfamiliar goods, unless the investment decision poses no risk to their reputation.

Please email m.lambrianidou@ucl.ac.uk for seminar link and password.