Marriage with Labor Supply

One of the key issues in understanding how tax policies affect labour supply is intrahousehold allocation of time and consumption. This is in particular the case of welfare benefits aimed at providing a safety net against poverty and work incentives at the same time, such as the Working Family Tax Credit programme in the UK (and the Earned Income Tax Credit in the US). The models used to address these issues typically take the household as a unit with aggregate preferences. The collective models of the family go one step further by describing intrahousehold resource allocation as a Pareto equilibrium for the exchange economy comprising each family member endowed with his/her own preferences. The limitation of the Collective framework for policy evaluation lies in the multiplicity of equilibria and the lack of a selection device that could tell not only how a welfare policy will affect resource allocation for a given sharing rule but also how it will affect the sharing rule itself. In this paper we design a search-matching models similar to that can both explain the formation of couples and select the equilibrium on the curve of optimal contracts.