Econometrica: May, 1990, Volume 58, Issue 3
Household Choices in Equilibrium
Robert A. Miller, Sumru Altug
This paper is an empirical investigation of equilibrium restrictions on household consumption and labor supply. It posits, estimates, and tests a model where the equilibrium behavior of agents sometimes leads them to locate on the boundary of their respective choice sets. The key to our framework is a simple factor structure which characterizes the effects of market forces on household choices and returns to financial assets. It can be rationalized by the two assumptions that household allocations are Pareto optimal and that the labor market is competitive. If markets were complete, then the factors would represent real wages to standardized labor, prices for the future contingent claims which are ultimately realized, and the marginal utilities of wealth to households. Our empirical work estimates household preferences and tests how well this parsimonious factor structure represents panel data on married couples and time series data on asset returns. Most of our estimates are roughly comparable to those found in previous work; we find no evidence against the simple factor representation, and cannot reject the intertemporal capital asset pricing model.