The standard ‘workhorse model’ used in economics to study consumption, saving and labour supply decisions, and which also provides the basis for virtually all of public economics, is that of an individual decision-maker, who divides his time between market labour supply and leisure, and allocates the resulting income to consumption goods. There is a vast literature that uses this model to analyse these decisions, both in a static, timeless setting, and within a framework in which consumption and time allocations are chosen over an entire life cycle, with or without uncertainty.
Although this class of models has over the years yielded many valuable insights, household survey data, econometric investigation and theoretical analysis all suggest that it provides an inadequate basis for obtaining a satisfactory understanding of household decisions, and for estimating the behavioural parameters of households formed by two adults, especially if they have children. This therefore limits its usefulness in addressing many of the problems of public economic policy, for which we need both an adequate conceptual framework and robust and reliable estimates of behavioural parameters. In chapters 2, 3 and 4 of this book we expand upon this assertion, which of course may not be readily accepted by at least some of our economist colleagues. In these chapters we first summarise briefly the main results of the model, review the empirical evidence, which generally rejects its implied restrictions on household consumption demand and labour supply functions, and then undertake a comprehensive survey of the alternative models that have been developed over the last three to four decades.