Haller, Hans: Outside Options, Household Stability, and Equilibrium Efficiency
World Conference Econometric Society, 2000, Seattle

Hans Gersbach, University of Heidelberg
Hans Haller, Virginia Polytechnic Institute
Outside Options, Household Stability, and Equilibrium Efficiency
Session: C-9-20  Monday 14 August 2000  by Haller, Hans
We are interested in the composition, formation, stability, and decision making of households operating in a competitive market environment. We study a general equilibrium model where households can have several members and make efficient collective consumption decisions. Individuals have the option to leave the household and make it on their own. Our main concern is the impact (on household stability and equilibrium efficiency) of introducing a second type of outside options: joining another household. Formally, adding more outside options refines the equilibrium concept and, hence, may eliminate certain equilibria. Like with many equilibrium refinements, there is the possibility of non-existence. Whereas we present sufficient conditions for equilibrium existence, there are circumstances where adding outside options of the second type leads to instability of households and, consequently, to non-existence of equilibrium. One might conjecture that more stringent equilibrium conditions make the surviving equilibria ``stronger'' or ``better'', having passed more tests than the eliminated ones. Whereas we present sufficient conditions for equilibrium efficiency, there are also instances where adding such outside options proves socially harmful.


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