Household Responses to Cash Transfers

This paper exploits the experimental set-up of the cash transfer program PROGRESA in rural Mexico to estimate a collective model of the household in order to investigate how parents allocate household resources. We show that household decisions are compatible with the collective model at the beginning of the program, but reject it later on. This shows that second order effects of cash transfer programs are important and suggests we need richer structural models to thoroughly analyse these policy interventions. We end this paper by proposing such a simple and tractable model of household behaviour, where decision makers may have misaligned preferences as a result of the treatment about the importance of a public good