Literature Review

Testing for efficiency using different theoretical approaches

To be able to develop testable hypotheses regarding the efficiency of intra-household resource allocation a theoretical model with assumptions that are realistic for an urban, developing country context is needed. Much of the economics literature has modelled households as one unit, maximizing a household utility function. This ‘unitary’ model implies either that preferences

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are identical within households, or that one ‘dictator’ makes decisions on the allocation of the pooled resources. The assumptions of the unitary model have been broadly rejected by empirical evidence (Schultz, 1990). Consequently, so-called ‘collective’ models have been developed to allow for the possibility that household members have different preferences. Different levels of bargaining power have been introduced to describe intra household resource allocation mechanisms. It is important to note that even under the assumptions of these models, the allocation of resources within the household is still found to be pareto efficient in theory (Browning and Chiappori, 1998).

The predictions of the collective model have been tested in various regional contexts. Early examples from developed countries include studies by Bourguignon et al. (1993) using French data, Browning and Chiappori (1998) using Canadian data, Lundberg et al. (1997) using data from the United Kingdom and Thomas and Chen (1994) using data from Taiwan. These studies confirm that the predicted outcomes of the collective model hold, including efficient allocation of resources. Outcomes consistent with the collective model have also been found in developing country contexts. Quisumbing and Maluccio (2003), for example, use data from Bangladesh, Ethiopia, Indonesia and South Africa. They proxy household member bargaining power by assets and education brought into the marriage. In the unitary model nothing but total household income should influence the demand of the household. However, analysing the effect of bargaining power on household expenditures shows that assets controlled by women or men affect household expenditures in different ways in three out of four countries. But, despite the evidence that bargaining power matters, they cannot reject the hypothesis that allocations of expenditures are pareto efficient in all four countries, which suggests that a collective model is appropriate.

One prominent study that rejects pareto efficiency is Udry (1996).²⁹ Using data collected by the International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) he tests the hypothesis that yields of different land plots are identical within households, controlling for plot characteristics and crop type. This hypothesis is rejected. Yields on plots of the same crop, within the same household, are significantly lower when that plot is controlled by a woman. On average the yield of female-controlled plots is less than 70 percent of the yield on plots controlled by men. This finding is inconsistent with efficiency. The study finds that one of the reasons for lower yields on plots controlled by women is inefficient allocation of inputs. Fertilizer is much more intensively used on plots controlled by mean than on plots controlled by women. As fertilizer shows diminishing returns, output could be higher if more fertilizer were allocated to the

29 Akresh (2005) also finds inefficient resource allocations within households in the regions where the data used by Udry (1996) was collected. However, using the nationally representative sample of Burkina Faso, Akresh (2005) cannot detect pareto-inefficiencies in the rest of the country.

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women’s plots. Furthermore, the magnitude of the loss due to inefficiencies is computed by estimating a CES production function and comparing actual yields with the yields that are predicted if resources were optimally allocated. Using this methodology Udry (1996) shows that 6 percent of output is lost due to inefficient input allocations.

Similarly a study by Goldstein and Udry (2008) on Ghana shows that women seldom have sufficient political power to ensure that their land is not expropriated. Since plots are likely to be taken away when they are fallow, women tend to leave their plots fallow for shorter periods and invest less than would be optimal. This study confirms that allocations of resources within households are often inefficient and that the gender dimension plays a major role in explaining these inefficiencies.

Another example is Andrews et al. (2010). From their theoretical model the authors show that in the case of pareto-efficiency the marginal rates of substitution of male and female labour should be equated over the crops within the household. The authors use data from the Uganda National Household Survey of 2005 and 2006. The study detects a gender division between cash crops and food crops. This gender division can be pareto efficient if labour is allocated according to comparative advantage and in line with the production technology available. However, the empirical tests reveal that pareto improvements would be possible if labour inputs were reallocated across plots and partners compensated adequately.The finding that gender differences play an important role is supported by a recent stream of literature that uses randomised experiments to analyse gender differences in small and medium sized enterprises (SMEs). These experiments randomly allocate cash or in-kind transfers to enterprises and analyse the effects on the firms. Such experiments have been carried out in Ghana (Fafchamps et al., 2011), Sri Lanka (De Mel et al., 2009) and the Philippines (Karlan and Zinman, 2010). The results from Ghana show that there is no effect of randomly allocated grants in enterprises run by woman with initial profits below the median. For enterprises run by men however, both grants and in-kind transfers have a significant and positive effect in profits. In Sri Lanka, men invest the randomly allocated grants and as a consequence profits rise by up to 14 percent of the grant amount. Women, in contrast, only invest large grants but do not earn any return on this investment. In the Philippines randomly allocated microcredit increases profits only in male led enterprises which in turn use the extra money to send the children to school. The loans have no effect on enterprises led by women.

Evidence on reasons for the gender gaps detected in these experimental studies is scarce. In Ghana it seems that capital alone is not enough boost enterprise growth in subsistence enterprises. In Sri Lanka, the evidence shows that the sectoral division of male and female headed enterprises may play a role as female headed

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enterprises operate in sectors where enterprises invest less and returns to investment are low. Finally, the findings presented in the first chapter of this thesis suggest that gender differences may play a role for resource allocation within households as marginal returns to capital are not equalised within household enterprises and the gender dummy is negative and significant in most specifications. However, the evidence from urban areas is still limited. In this paper we try to narrow this research gap. To test for efficiency we adopt the methodology used by Udry (1996) and apply it to an urban context in seven countries in SSA.

This evidence on gender differences in informal enterprises will contribute to an evidence-based assessment of the gender impacts of micro-finance policies, and the effectiveness of targeting women for these and other interventions.