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A Transaction Cost Approach to Families and Households Author(s): Robert A. Pollak Source: Journal of Economic Literature, Vol. 23, No. 2 (Jun., 1985), pp. 581-608 Published by: American Economic Association Stable URL: https://www.jstor.org/stable/2725625 Accessed: 04-10-2019 16:26 UTC

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This content downloaded from 128.252.111.81 on Fri, 04 Oct 2019 16:26:23 UTC All use subject to https://about.jstor.org/terms Journal of Economic Literature Vol. XXIII (June 1985), pp. 581-608

A Transaction Cost Approach to Families and Households

By Robert A. Pollak

University of Pennsylvania

This research was supported in part by the National Science Founda- tion, the National Institutes of Health, and the Population Council. My intellectual debts to Oliver E. Williamson are even greater than the references to his work suggest. I am grateful to Judith Farnbach, Claudia Goldin, Vivian R. Pollak, Samuel H. Preston, and Susan Watkinsfor helpful comments and conversations during this paper's prolonged gestation. I am also grateful to Gary S. Becker, Peter Davis, Stefano Fenoaltea, Janet T. Landa, Marilyn Manser, and Ann D. Witte for helpful comments. The views expressed are my own and the usual disclaimer applies.

FAMILIES ARE FASHIONABLE. Within goods, supply of labor) treating the house- the last decade, social scientists have hold as a "black box" identified only by rediscovered families and households as its preference ordering.2 The "new home fit subjects for serious analysis. Demog- economics" takes a broader view, includ- raphers and historians, anthropologists ing not only market behavior but also such and sociologists have played the major nonmarket phenomena as fertility, the ed- roles; economists, traditionally preoccu- ucation of children, and the allocation of pied with markets, have been less in- time. The major analytic tool of the new volved.' home economics is Becker's household The traditional economic theory of the production model, which depicts the household focuses exclusively on observ- household as combining the time of house- able market behavior (i.e., demand for hold members with market goods to pro- duce the outputs or "commodities" it ulti- 1 Peter Laslett (1972), Tamara K. Hareven (1977), mately desires.3 and John Demos and Sarane Spence Boocock (1978) are collections exemplifying the work outside eco- 2On the theoretical side, see Gerard Debreu nomics. Gary S. Becker's work over the last fifteen (1959) or Kenneth J. Arrow and Frank H. Hahn years, culminating in his Treatise on the Family (1971); on the empirical side, Laurits R. Christensen, (1981), is the leading example within economics. For Dale W. Jorgenson, and Lawrence J. Lau (1975) or a legal scholar's enthusiastic endorsement of the Robert A. Pollak and Terence J. Wales (1978, 1980). power of economic analysis in this area, see Richard 3The locus classicus of the household production A. Posner (1980). Victor R. Fuchs (1983), writing for literature is Becker (1965). Robert T. Michael and a less specialized audience than Becker, provides Becker (1973) provide a sympathetic restatement; an empirical analysis of "how we live" from an eco- Marc Nerlove (1974) and Zvi Griliches (1974) express nomic perspective and discusses its implications for some reservations; Pollak and Michael L. Wachter public policy. (1975) emphasize its limitations. Richard A. Easter-

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The new home economics ignores the contracts.5 Transaction cost analysis of internal organization and structure of vertical integration posits a situation in families and households. Although this which efficiency requires the use of physi- may surprise noneconomists who tend to cal or human capital that is specific to the believe that the internal organization and relationship between a particular supplier structure of an institution are likely to af- and a particular customer; since the value fect its behavior, economists find it natu- of such "idiosyncratic" capital depends on ral. For the economist the most economi- establishing and maintaining the supplier- cal way to exploit the fundamental insight customer relationship, the willingness of that production takes place within the either party to invest in idiosyncratic capi- household is to apply to households tech- tal depends on assuring the stability of the niques developed for studying firms. Since relationship. Firms often avoid using con- neoclassical economics identifies firms tracts to structure complex, ongoing rela- with their technologies and assumes that tionships because doing so is hazardous. firms operate efficiently and frictionlessly, Short-term contracting is hazardous be- it precludes any serious interest in the econ- cause, even when contract renewal is omizing properties of the internal struc- mutually beneficial, one party or the other ture and organization of firms. The new may have advantages that can be ex- home economics, by carrying over this ploited in bilateral negotiations over re- narrow neoclassical view from firms to newal terms; hence, short-term contracts households, thus fails to exploit fully the make it risky to accumulate capital whose insight of the household production ap- value is contingent on the relationship proach. In this essay I argue that the trans- continuing and thus discourage invest- action cost approach which recognizes the ment in such specific capital. The prob- significance of internal structure provides lems of contract renewal can be avoided a broader and more useful view of the or at least postponed by long-term con- economic activity and behavior of the tracts, but only if such contracts are "com- family. plete" in the sense that they specify the The transaction cost approach has been obligations of the parties under every pos- primarily concerned with firms and the sible contingency. Complete long-term organization of production.4 The treat- contracts are costly or impossible to write ment of vertical integration is paradig- and enforce, however, a reflection of matic. Neoclassical economics explains bounded rationality and asymmetric in- vertical integration as a response to tech- formation; and incomplete long-term con- nological inseparabilities; transaction cost tracts which fail to deal with every contin- economics explains vertical integration as gency expose the parties to the hazards a response to the difficulties of regulat- of bilateral bargaining. To avoid these con- ing ongoing relationships by means of tracting hazards firms often rely on some more complete form of integration such lin, Pollak, and Wachter (1980) discuss applications as merger. Thus, contracting difficulties- to fertility and provide references to the recent liter- the problems of negotiating, writing, mon- ature. 4Oliver E. Williamson (1975, 1979, 1981), building itoring, and enforcing agreements-are on the older institutionalist tradition, on the work central instances of transaction costs, and of Ronald H. Coase (1937), and on the "Carnegie transaction cost economics asserts that tradition" (e.g., Herbert A. Simon 1957), has been primarily responsible for developing the transaction they are significant determinants of the cost approach. Other important transaction cost pa- pers are Victor P. Goldberg (1976), and Benjamin 5 Time thus plays a crucial role in transaction cost Klein, Robert G. Crawford, and Armen A. Alchian analysis, a point emphasized by Gordon C. Winston (1978). (1982, Ch. 12).

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organization of production. Since bureau- markets. Addressing the fundamental cratic structures have their own charac- problems of institutional choice-whether teristic disabilities, internal governance particular activities will be mediated by does not eliminate all difficulties associ- markets or carried out within families, ated with a transaction or exchange. Nev- firms, governments, or nonprofit institu- ertheless, replacing a market relationship tions-requires extending the transaction by an organization with an appropriate cost analysis from firms to families and to governance structure often safeguards the other institutional modes.6 interests of both parties. The transaction cost literature has virtu- The transaction cost approach focuses ally ignored families and households.7 The on the role of institutions in structuring complex, long-term relationships. Applied 6Henry B. Hansmann (1980) provides an excellent transaction cost analysis of nonprofit enterprise. to the firm, transaction cost economics There does not appear to be a corresponding transac- studies the boundaries, structure, and in- tion cost analysis of the state, although Goldberg ternal organization of producing units. To (1976) and Williamson (1976) hint at such a theory in their discussions of regulation. The "Chicago do so, it relaxes the assumption of friction- School" theory of economic regulation fails to offer less efficiency and views the firm as a hier- such an analysis of the state. On the contrary, it as- archical governance structure within sumes that such an analysis is unnecessary because the state does not differ significantly from other or- which production takes place. By focusing ganizations. Posner (1974), for example, asserts: ". on structure the transaction cost approach no persuasive theory has yet been proposed as to provides an alternative explanation of why (government) agencies should be expected to be less efficient than other organizations. The moti- market behavior that traditional econom- vation of the agency employee to work diligently ics ascribes to technology, and it illumi- and honestly is similar to that of the employee of a nates aspects of nonmarket behavior that business firm" (p. 338). 7Transaction cost papers often mention in passing traditional economics ignores. In many re- that the analysis applies to marriage or the family. spects the neoclassical and transaction Goldberg (1976, p. 428, fn. 9) does so in a sentence cost approaches are complements rather in a footnote; Klein, Crawford, and Alchian (1978, p. 323) devote a paragraph to it; and Williamson than substitutes, addressing somewhat dif- (1979, p. 258), two paragraphs. Yoram Ben-Porath ferent issues and offering somewhat differ- (1980) is the only sustained transaction cost analysis ent ranges of admissible explanations. of issues related to marriage or the family and in some respects my discussion parallels his. He begins The transaction cost approach analyzes by noting that neoclassical economic theory assumes the "economizing properties of alterna- that economic agents-individuals and firms-trans- tive institutional modes for organizing act with "the market" rather than directly with other agents; in this sense, neoclassical theory postulates transactions" (Williamson 1979, p. 234). "anonymous" agents and "impersonal" transactions. The presumption is that the costs to be Ben-Porath's analysis of the family flows from his minimized include transaction costs, that more general concern with relaxing this assumption and recognizing that the "identity" of economic these costs vary systematically from one agents-their ability to recognize and be recognized institutional mode to another, and that by one another-is crucial to many types of eco- each activity is carried out by the institu- nomic interactions. His title, "The F-Connection: Families, Friends, and Firms and the Organization tion that can perform it most efficiently. of Exchange," is indicative of these broader con- The transaction cost literature has thus far cerns. Ben-Porath emphasizes the changing role of emphasized production activities and, the family in various stages of economic develop- ment and the effect of development on the family. more particularly, intermediate-product In a review of Becker's Treatise, (Ben-Porath 1982), transactions; the central issue has been he summarizes his own views: whether technologically separable activi- The traditional family is the epitome of specialization ties will be carried out by a single verti- by identity, based on own use of productive services and on mutual insurance and support ... Modern eco- cally-integrated firm rather than by sepa- nomic organization is associated with a market struc- rate firms dealing with each other through ture based on specialization along the impersonal

This content downloaded from 128.252.111.81 on Fri, 04 Oct 2019 16:26:23 UTC All use subject to https://about.jstor.org/terms 584 Journal of Economic Literature. Vol. XXIII (June 1985) neglect of families in Williamson's Markets a key role in the transaction cost approach; and Hierarchies (1975) probably flows and, even in the context of the firm and from his assumption that "in the begin- vertical integration, the transaction cost ning, there were markets" (p. 20). While approach is often charged with failing to this assumption is clearly intended to pro- provide a framework for empirical re- vide an analytical rather than an anthro- search. Not surprisingly, the offspring of pological origin, it is probably responsible the marriage of the subject matter of the for his neglect of family organization as new home economics with the analytical a theoretical or an actual solution to the orientation of the transaction cost ap- incentive and monitoring problems en- proach is not a system of equations that countered by peer groups and simple hi- an econometrician could estimate. Never- erarchies. The neglect of families and theless, because the ability of the transac- households represents a missed opportu- tion cost approach to provide a framework nity. for empirical analysis is a crucial issue, Applied to the family, the transaction throughout this essay I identify topics and cost approach generalizes the new home areas of research suggested by the transac- economics by recognizing that internal tion cost approach. structure and organization matter. It My primary purpose, however, is to de- treats the family as a governance structure scribe an approach, not to specify a model. rather than a preference ordering or a This paper is an essay, not a research pro- preference ordering augmented by a pro- gram or agenda. The methodological justi- duction technology. This has two conse- fication for such an enterprise is that an quences for the analysis of the family. occasional exploratory essay is useful be- First, by focusing on the family's ability cause formal models are self-contained to provide incentives and monitor perfor- constructs and cannot tell us what phe- mance and on how its ability to do so dif- nomena are worth modeling.9 fers among activities and societies, it clari- fies which activities are carried out by the with the theory." He emphasizes the crucial role of unobserved variables, wonders "whether any data family. Second, by emphasizing the role could be shown convincingly to be inconsistent with of institutions in structuring complex, the theory," and hence is "not prepared to agree long-term relationships, the contracting that the theory has already gained a high degree of empirical verification" (p. 71, emphasis in origi- perspective of the transaction cost ap- nal). proach elucidates allocation and distribu- 9 Critics of the transaction cost approach often ob- tion within the family. ject that it is difficult or impossible to test, refute or falsify, claiming that it explains everything and, Because of the central role of unobserv- therefore, explains nothing. Williamson (1979, p. able variables (e.g., preferences, house- 233) discusses this criticism and argues that carefully hold technology, genetic endowments), formulated versions of the transaction cost approach are not vulnerable to it. We have already seen that the new home economics view of the fam- this objection is sometimes raised against the new ily does not lead simply or directly to a home economics (Hannan 1982, p. 71). The objection model capable of empirical implemen- is often expressed in the positivistic language that Paul A. Samuelson's Foundations of Economic Anal- tation.8 Unobservable variables also play ysis (1947) has made familiar to economists. Twenty years after Thomas S. Kuhn's The Structure of Scien- tific Revolutions (1962), many philosophers of sci- dimensions of transactions . . . Thus, in a modern econ- ence are pessimistic about the possibility of "testing" omy, the family sheds much of its productive activities competing theories or paradigms, even in the physi- and specializes more in affective relationships and joint cal sciences. Closer to home, it is not clear what consumption [p. 61]. set of observations would cause economists to aban- 8 Michael T. Hannan (1982), in a review of Becker's don the neoclassical theory of consumer behavior, Treatise, points out that Becker fails "to make clear or even to reject the version of it which assumes exactly what kinds of evidence would be inconsistent that preferences (for unobservable "commodities")

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The paper is organized as follows. In C I examine the role of transaction cost the first section I examine the advantages considerations in family governance of and disadvantages of family governance market-oriented work by discussing fam- and apply the analysis to two types of eco- ily farms and family-managed firms, that nomic activity: production for home con- is, firms in which several family members sumption and production for a market. In play active managerial roles. Finally, in the second section I turn to the internal Section D, I compare the characteristic organization of families and households, advantages and disadvantages of family focusing on allocation and distribution governance with those of market gover- within the family. I.begin by analyzing nance and argue that certain identifiable marriage as a "contracting problem." I types of activities are more efficiently or- then argue that the transaction cost ap- ganized through markets while others are proach is broadly consistent with bargain- more efficiently carried out by families. ing models of marriage, and examine the A. Advantages and Disadvantages roles of marriage-specific capital from a bargaining perspective. Finally, I discuss The advantages of family governance social exchange theory and its relationship can be grouped into four categories: in- to the transaction cost approach. Section centives, monitoring, altruism, and loy- III is a brief conclusion. alty. All of the family's incentive advan- tages arise because its members have I. The Family as a Governance Structure claims on family resources; some of these for Economic Activity advantages can be analyzed in a single pe- riod setting, while others depend on the The advantages of the family as a gover- anticipated continuity of family member- nance structure for organizing particular ship. Even in a one-period setting family activities flow from its ability to integrate members have reason to take account of those activities with preexisting, ongoing, the effects of their actions on family significant personal relationships.10 I ex- wealth. The strength of this incentive ef- amine the advantages of family gover- fect depends on the size of the family and nance and its corresponding disadvan- on its sharing rule: It is weakest in large tages in Section A. In Section B I discuss families with equal sharing, and strongest the role of transaction cost considerations in small ones with sharing rules condi- in the family's production for its own con- tioned on individual behavior. Those in- sumption, focusing on the family's role as centive advantages that arise only in a a provider of insurance, that is, protection multiperiod setting and that depend on against the economic consequences of un- expectations of lifelong family member- certain, adverse events. The family has ship make individuals reluctant to sacri- been the traditional source of such protec- fice long-run benefits for short-run gains. tion throughout history; even in advanced Without such expectations individuals industrial societies some types of insur- would be less certain that their claims ance continue to be provided by the fam- would be honored in the future and, ily, while others are provided by the mar- hence, would act to move family con- ket, and still others by the state. In Section sumption or income toward the present. are exogenous and identical over time and space Furthermore, individuals may value fam- (George J. Stigler and Becker 1977). Similarly, it is ily consumption and income beyond their not clear what set of observations would convince own lifetimes because of their concern for sociologists that tastes are exogenous. 10 Burton Benedict (1968, p. 2) refers to such rela- the welfare of their own children or tionships as "affectively charged." grandchildren. Thus, prudential and dy-

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nastic considerations combine to give fam- altruism or of the particular incentive, ily members direct, long-term interests in monitoring, and altruism attributes of the the family's well-being. family, it is useful to treat loyalty as a sepa- Because economic relationships are en- rate category and to examine its social and twined with significant personal ones, the psychological basis. family commands rewards and sanctions The social basis of family loyalty rests not open to other institutions. Severe mis- on generally accepted norms or standards conduct involves not simply the risk of of conduct regarding the treatment of dismissal from a job but also the risk of family members which are enforced ostracism or expulsion from the family, a through reputation. Individuals perceived penalty drastic enough that it is likely to as fulfilling family obligations are re- be an effective deterrent to serious mal- warded with respect and esteem and feasance. those perceived as violating them are pun- The monitoring advantages of the fam- ished by loss of reputation. The value and ily also flow from the entwining of eco- importance of reputation varies from one nomic and personal relationships. Dili- society to another: In traditional societies gence and work habits, consumption with little geographical mobility, reputa- patterns and lifestyles are more likely to tion may be an important factor in per- be observable because the network of re- sonal and business success, and loss of rep- lationships involving "economic activity" utation a significant penalty. and "family" are integrated. The family's The psychological basis of family loyalty informational advantages are greatest depends on individuals' internalizing soci- when its members live together as a joint ety's values, standards, and expectations. or extended family household-a common Fulfilling family obligations becomes a arrangement in many developing coun- source of pleasure, pride, and satisfaction, tries. But monitoring advantages, al- and violating them a source of guilt. The though facilitated by communal living ar- rewards and sanctions are thus internal- rangements, do not depend exclusively on ized, incorporated into individuals' pref- them: Social contacts within the family erences and values. provide information unavailable to outsid- The value of loyalty is not confined to ers. families. Nations, clubs, and firms attempt "Altruism," based on "love," "affec- to instill and foster loyalty in their citizens, tion," and "caring," serves to limit oppor- members, employees, and managers. In- tunistic behavior within the family.11 The deed, the language of loyalty itself relies affectional relationships among family heavily on family metaphors. Citizens are members, whatever their basis, may pro- urged to support "Mother Russia" or the vide a relatively secure and stable founda- "Fatherland"; college students join "fra- tion for a wide range of activities. ternities" or "sororities"; workers join la- "Family loyalty" provides a convenient bor unions whose names often include the rubric for discussing dimensions of incen- word "brotherhood"; firms like "Ma Bell" tives and monitoring that economists are have encouraged employees to view them trained to ignore. Although what we call as a family and in doing so claim their family loyalty may be a consequence of allegiance, support, and love. These at- tempts to encourage loyalty reflect its in- 11 Becker uses the term "altruism" to refer to a strumental value to organizations, as Al- very special type of interdependent preferences. I discuss Becker's notion of altruism and his theory bert 0. Hirschman (1970) and Alchian and of allocation within the family in Section IIB. Harold Demsetz (1972, p. 790-91) have

This content downloaded from 128.252.111.81 on Fri, 04 Oct 2019 16:26:23 UTC All use subject to https://about.jstor.org/terms Pollak: Transaction Cost and Families 587 argued. Almost unconscious reliance on source of strength for the firm, but the family metaphors to describe or foster loy- family's instability becomes a source of alty suggests that family ties are recog- weakness. nized as ties that bind.12 Second, inefficient behavior or slack Notwithstanding its advantages, family performance may be tolerated because of governance has four characteristic disad- the difficulty of evaluating and disciplin- vantages. First, conflict may spill over ing family members. Objective and dis- from one sphere into the other. Although passionate evaluations of the ability and the family may function harmoniously, performance of family members are diffi- bound together by ties of affection and cult to make. Furthermore, acting on ad- interest, even the most casual empiricist verse evaluations may provoke deep- must recognize the possibility of discord. seated resentment persisting through The largely anecdotal literature on family generations. The threat of ostracism gives firms emphasizes conflicts between par- family firms an advantage in controlling ents and children and conflicts among gross malfeasance; but because of its se- siblings.13 Conflicts between parents and verity and because its use imposes signifi- children centering on the desire of chil- cant costs on others in the family, ostra- dren for independence and of parents to cism is not a credible threat against retain control may be continual sources shirking, slack performance, or minor in- of friction and may pose particularly diffi- fractions. The family has available a wide cult problems of leadership succession for range of social rewards and sanctions that family firms. Sibling tensions and rivalries it could in principle use to express its ap- whose roots lie buried in early childhood proval or disapproval of an individual's ac- can influence the behavior and relation- tions or behavior; in practice, however, ships of middle-aged men and women as the family may not be able to calibrate their generation assumes control of the and utilize these rewards and sanctions family firm. By linking the firm and the effectively. It is unclear whether family family, the family's stability becomes a governance is more or less effective than nonfamily governance in discouraging mi- 12Janet T. Landa (1981) analyzes the role of ethnic nor infractions and slack performance. ties as well as kinship ties and the importance of Furthermore, nepotism may prove a seri- gradations in these relationships in establishing the reliability of trading partners. Landa and Janet W. ous problem for the family firm.14 Salaff (1982) examine the rise and fall of the Tan Third, the capacities, aptitudes, and tal- Kah Kee Company, a Singapore-based family firm ents of family members may fail to mesh which they describe as the largest Chinese-owned rubber manufacturing and exporting firm in South- with the needs of the family's economic east Asia in the 1920s (p. 21). Drawing on Landa's analysis, they show that kinship and ethnic ties 14 Nepotism may be an even more serious problem played an important role in the growth of the firm. in other governance structures, and it is likely to They attribute the fall of the Tan Kah Kee Company be most serious in those that delegate substantial to the collapse in rubber prices during the Depres- discretionary authority to individuals who lack com- sion and the consequent necessity of ceding control mitment to the organization's objectives. It is no co- of the firm to "outsiders" (i.e., British bankers and incidence that the term "nepotism," from the Italian their agents). Landa and Salaff provide extensive ref- nepotismo, "favoring of 'nephews,"' was first used erences to the literature on family firms in sociology, to describe practices of the pre-Reformation Catho- anthropology, and development economics. lic Church: "A euphemistic use of 'nephew' is that 13 Peter Davis (1983) summarizes this literature of the natural son of a pope, cardinal or other ecclesi- and presents an analytical framework that is broadly astic; and from the practice of granting preferments consistent with the transaction cost analysis devel- to such children the word 'nepotism' is used of any oped here. An article in Fortune, "Family Business favouritism shown in finding positions for a man's is a Passion Play," (Gwen Kinkead 1980) gives the family" ("Nephew," Encyclopaedia Britannica, 11th flavor of the popular literature. ed. 1911).

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activities. The problem is not that certain B. Family Governance of Production for activities require training; traditionally Home Consumption: Insurance families have assumed responsibility for Home is the place where, when you have to go there, children's education and for vocational They have to take you in. training. The problem is that certain activ- ities require special talents. Whether the Robert Frost "The Death of the Hired Man" talent mix available within the family in a particular generation meshes well with The household production approach, the requirements of the family's activities with its emphasis on prices and technol- depends in part on genetics and in part ogy, has dominated the analysis of activi- on luck. When no available family mem- ties in which households or families pro- bers manifest the required aptitudes, then duce goods for their own consumption. such activities, if they are to remain within This analysis captures the essence of some the family, must be carried on without household "make-or-buy" decisions, but suitable personnel. Whether family gover- other household production activities- nance entails substantial inefficiencies de- such as the provision of education, health pends on the ability of alternative gov- care, and insurance-are better analyzed ernance structures to achieve better from a transaction cost perspective. matches between individuals and activi- Protection against the adverse eco- ties. Thus, family governance is most effi- nomic consequences of old age, separation cient in activities requiring talents that and divorce, unemployment, or the illness are difficult for nonfamily institutions to or death of an earner can be provided in evaluate and in those not requiring rare many ways. In many societies the family or unusual aptitudes. is the principal provider of such protec- Fourth, size limitations implied by fam- tion. In advanced industrial societies the ily governance may prevent the realiza- family, the market, and the state provide tion of technologically achievable econo- varying degrees of protection against mies of scale. The boundaries of the family these and other adversities. Market insur- or kin group relevant for organizing eco- ance typically provides monetary benefits nomic activity are influenced by economic according to an explicit schedule. The considerations, not rigidly determined by state sometimes provides monetary bene- biology. Nevertheless, because expansion fits according to an explicit schedule (e.g., weakens the incentive and monitoring ad- aid to dependent children) and sometimes vantages of family governance, the family benefits in kind (e.g., direct provision of is ill-equipped to exploit scale econo- care for the sick, handicapped, or dis- mies.15 Insurance, an activity in which abled);lim- such benefits, whether in cash or ited scale implies limited risk-spreading, in kind, are not always characterized as provides a range of illustrations, including insurance. The family, in contrast, typi- some in which the balance of advantages cally provides benefits in kind rather than and disadvantages favors family gover- in cash and according to an implicit rather nance. than an explicit schedule. Family provision of benefits often en- 15 Family firms, if they are to grow in size and tails restructuring domestic arrangements complexity to exploit economies of scale, face the problem of integrating professional nonfamily man- so that family members who had previ- agers with family managers. The growth possibilities ously lived in separate households form of a family firm are severely constrained if it is unable a single residential unit. Unemployed or unwilling to attract and accept nonfamily manag- ers, yet success in introducing nonfamily managers young adults and recently separated or di- may undermine its character as a family firm. vorced individuals and their children of-

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ten move in with parents; orphans are loss better than potential insurers (asym- taken in by relatives; elderly parents often metric information) and when individuals move in with their children. Because the can opportunistically misrepresent their household and the nuclear family tend to loss probabilities to potential insurers.19 coincide, the terms "household" and This conjunction of asymmetric informa- "family" are often used interchangeably.16 tion and opportunism leaves individuals This usage is misleading even for ad- without credible ways of communicating vanced industrial societies and it is seri- to a potential insurer their true risk char- ously misleading for developing countries. acteristics. Under these circumstances po- Analysis of household formation-the es- tential insurers find it costly or impossible tablishment of separate households by the to distinguish between high-risk and low- young and the elderly, or as a conse- risk individuals and, hence, the market quence of separation or divorce-and, must charge everyone the same premium. more generally, analysis of the role of kin Low-risk individuals may find this pre- ties in economic relationships requires mium excessive and choose to self-insure maintaining the distinction between (i.e., to cover their own losses instead of households and families.17 Although the purchasing market insurance). With a con- phrase "household production" is too tinuum of risk-classes, it may be impossi- well-established to be displaced by "family ble for market insurance to operate at all: production," in the provision of insurance there may be no premium level that and in many other activities, the funda- would induce purchases by a group of in- mental unit is not the household but the dividuals whose total expected losses family. would be covered by their total premium The insurance literature identifies two payments.20 Moral hazard arises because reasons why market insurance may be in- individuals can undertake activities that efficient: "adverse selection" and "moral alter the probabilities they will suffer hazard."18 Adverse selection arises when losses or that mitigate the magnitudes of each individual knows his probability of losses that do occur. Because insurers can- not easily monitor whether individuals

16For example, Laslett (1972) uses the term "fam- have undertaken such activities and be- ily" to refer to a household-a co-resident domestic cause individuals can opportunistically group-and much of his work has been devoted to misrepresent whether they have done so, documenting the predominance of nuclear house- holds in Europe during the last three centuries. 17 Fuchs (1983) provides an overview and refer- ences to the literature on many of these issues. On 19 Williamson (1975, p. 31-33) terms this conjunc- separation and divorce, see Becker, Elisabeth M. tion of asymmetric information and opportunism Landes and Michael (1977). On the establishment "information impactedness." of separate households by the young and the elderly, 20 In the "lemons" paper (Akerlof 1970) the used- see Marjorie B. McElroy (1985) and Michael, Fuchs car market serves to illustrate this phenomenon. Sell- and Sharon R. Scott (1980), respectively. For work ers know the quality of the cars they are offering emphasizing the strength and importance of kin ties for sale, but potential buyers know only the average and challenging the myth that the predominance quality of used cars sold in the market. These circum- of nuclear households implies the irrelevance of stances can give rise to two distinct problems. First, other family relationships, see, for example, Philip as Akerlof points out, "it is quite possible to have J. Greven, Jr. (1970), Michael Anderson (1971) and the bad driving out the not-so-bad driving out the Hareven (1977, 1978). medium driving out the not-so-good driving out the 18 Mark V. Pauly (1974), Michael Rothschild and good in such a sequence of events that" no transac- Joseph E. Stiglitz (1976), and Charles Wilson (1977). tions take place (p. 239)-that is, the only equilib- Two important and widely cited papers going well rium may be one in which there is no trade. Second, beyond the insurance issues are Arrow (1963) and as Rothschild and Stiglitz (1976) point out, equilib- George A. Akerlof (1970). Isaac Ehrlich and Becker rium may fail to exist. Wilson (1980) shows that price- (1972) discuss the role of "self-protection" as a substi- setting conventions can play a crucial role in markets tute for market insurance. with adverse selection.

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market insurance arrangements may pro- by combining households. Additionally, vide protection against the econom- disputes growing out of the insurance ar- ic consequences of uncertain, adverse rangement itself are potential sources of events only at the cost of substantial ineffi- family conflict. ciency. Second, it is difficult to make objective The state has certain advantages over and dispassionate evaluations of risk and market insurers in dealing with adverse of the extent to which individuals under- selection and moral hazard. Compulsory take to alter these probabilities or mitigate insurance-whether provided by the mar- the magnitude of losses. Furthermore, ket, as with automobile liability insurance, once such evaluations of family members or by the state, as with social security- are made, they may be difficult to act on: avoids adverse selection by preventing Poor risks, once identified, cannot easily low-risk individuals from opting out. State- be excluded from participation in family imposed standards of conduct can reduce insurance arrangements. moral hazard, but asymmetric informa- Third, because the family or kin group tion and opportunism pose problems for is relatively small, risks cannot be spread the state as well as for market insurers. widely enough to realize fully the advan- While state enforcement may be more ef- tages of insurance. This problem is most fective than private enforcement, it is serious in situations involving small proba- hardly a panacea: Requiring recipients of bilities of large losses. Furthermore, when unemployment compensation to seek family members face risks that are posi- work has proved difficult to enforce. tively correlated, the family's ability to As a provider of insurance, the family protect itself through self-insurance is has three important transactional advan- even more limited than its size would sug- tages over the market and the state. First, gest. For example, family members work- adverse selection is limited because out- ing in the same industry or growing the siders cannot easily join the family nor in- same crops in the same region are poorly siders easily withdraw. Second, informa- positioned to provide each other with tion disparities between individuals and unemployment insurance or crop insur- their families are generally smaller than ance. Thus, since the effectiveness of in- those between individuals and nonfamily surance depends on both the size of the insurers. Proximity yields substantial mon- insured group and on the independence itoring advantages, permitting the family of the risks to which its members are ex- to assess health or intensity of job search posed, the transaction cost advantages of more easily, economically, and accurately family insurance are balanced by techni- than the market or the state. Third, both cal disadvantages. family loyalty and cultural norms limit op- Insurance is typical of a substantial class portunistic behavior. Virtually every soci- of economic activities for which the trans- ety condemns cheating one's family far action cost advantages of family gover- more strongly than cheating strangers- nance often outweigh the technical ad- blood is thicker than water. vantages of nonfamily governance. The As a provider of insurance the family balance between these advantages and also has characteristic disabilities. First, disadvantages is not immutable, as dem- conflicts originating in personal relation- onstrated by the shifting of some, but by ships can impinge on the insurance ar- no means all, insurance functions from the rangement. Such conflicts may make family to the market, to nonprofit institu- those obligated to provide benefits unwill- tions, and to the state. With insurance, as ing to do so, especially when the benefits with the provision of education and health call for restructuring living arrangements care, market governance entails substan-

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tial transaction cost difficulties. Hence, in dren or, in many societies, by members societies in which these functions are not of an extended family who live together carried out by the family, they tend to in a single household-is the dominant be assumed by nonprofit institutions and form of agricultural organization in the the state rather than by profit-oriented United States and in most developed and firms. developing countries.23 The family farm can be regarded as an organizational solu- C. Family Governance of Market- tion to the difficulty of monitoring and Oriented Work: Family Farms and supervising workers who, for technologi- Family-Managed Firms cal reasons, cannot be gathered together The family-managed firm and the in a single location. family farm solve different organizational When agricultural tasks can be moni- problems: The family-managed firm is a tored easily in terms of inputs or outputs, response to the difficulty of supervising family farms are often overshadowed by managers, the family farm a response to other forms of agricultural organization. the difficulty of supervising workers.21 De- For some crops and some tasks hired labor spite the differences between supervising can be concentrated into work gangs and managers and supervising workers, the supervised directly, so plantation agricul- advantages and disadvantages of family- ture is possible.24 For other crops and tasks managed firms and family farms are simi- (e.g., harvesting) output can be measured lar, and both illustrate the role of family directly and workers paid on a piece-rate governance of market-oriented work.22 basis. Thus, agricultural wage labor, hired The family farm-typically worked on a daily or a seasonal basis, is important jointly by a married couple and their chil- in both developed and developing coun- tries. Nevertheless, since most farm tasks 21 I distinguish family-managed firms both from are not susceptible to either of these forms firms that are merely family-owned and from those of supervision or monitoring, the family in which only a single family member participates in management. farm is the dominant form of agricultural 22 In both cases the focus on the incentive proper- organization.25 ties of family governance of market-oriented activity suggests a comparison with consumer or producer cooperatives or labor-managed firms. Jaroslav Vanek 23 Family farms accounted for 67.6 percent of the (1969) makes strong claims for the advantages of the value of farm products sold in the U.S. in 1974, the latter: most recent year for which these data were reported in the Statistical Abstract of the United States (10th Without any doubt, labor-management is among all the ed., 1984, p. 653, Table 1143). existing forms of enterprise organizations the optimal 24 Plantation agriculture is sometimes compatible arrangement when it comes to the finding of the utility- with slavery. Stefano Fenoaltea (1984), in a rich and maximizing effort, i.e. the proper quality, duration and fascinating paper, argues that the "pain incentives" intensity of work, by the working collective. Not only to which slaves can be subjected make slave labor is there no situation of conflict between management more suitable for "effort-intensive" than "care-inten- and the workers that might hinder the finding of the sive" activities, and that the threat of sabotage makes optimum, but the process of self-management itself can slave labor more suitable for land-intensive than cap- be viewed as a highly efficient device for communica- ital-intensive activities. Thus slave gangs were better tion, collusion control and enforcement among the par- suited to the cotton and corn agriculture of the ticipants [p. 1011]. American South than to the vine and olive arboricul- Whether labor-managed firms actually realize these ture of the Mediterranean. advantages is an open question; Williamson's analysis 25 Discussions of agricultural organization in eco- of the disabilities of peer group organization of pro- nomics have focused almost exclusively on other is- duction suggests that they may not. Furthermore, sues. The principal focus has been on sharecropping, the ability of a family to realize these alleged advan- and while incentive and monitoring issues are some- tages must depend on its internal organization and times mentioned (along with risk aversion and im- structure: A hierarchical family (e.g., patriarchal) perfections in capital and other markets) family as- would not operate in the manner Vanek suggests, pects of agricultural organization are ignored. In although it might offer other advantages for organiz- particular, most discussions assume that the share- ing production. cropper is an individual worker. Similarly, discus-

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Empirical work on agricultural organi- Managers in family-managed firms have zation has seldom distinguished between expectations of a continuing relationship family and nonfamily labor, although re- with the firm and claims on its profits and, cent research suggests the importance of therefore, are subject to different and per- doing So.26 The transaction cost approach haps more effective rewards and sanctions draws attention to this distinction by offer- than managers in other firms. Both types ing two reasons why family and nonfamily of firms can reward successful managers labor might be imperfect substitutes: the with salary increases and promotions, but incentive and monitoring advantages of performance is often difficult to assess and family organization which I have empha- managers may be able to manipulate sized in this essay and the idiosyncratic short-run indicators of performance at the information and knowledge of local condi- expense of the long-run objectives of the tions that family members are likely to firm. Because family managers expect a possess.27 The transaction cost approach continuing relationship with the firm, generates interesting empirical research they are less tempted to sacrifice long-run projects in this field because it helps to advantages for short-run gains.29 analyze the degree to which family and The behavior of family managers can nonfamily labor are imperfect substitutes usually be monitored more easily than in various types of agricultural production that of nonfamily managers. The general and it helps to sort out the roles of incen- principle requires no further elaboration, tives and asymmetric information.28 but it must be qualified by the observation that family members living three thou- sions of rural labor markets often treat labor as homo- sand miles apart may monitor each other geneous, failing to distinguish among men, women, less effectively than managers in non- and children and seldom offering integrated models of family labor supply. See Howard N. Barnum and family firms located in a small city. Family Lyn Squire (1979) and Hans P. Binswanger and Mark relationships are not the sole determinant R. Rosenzweig (1984). Peter Murrell (1983) offers a of monitoring costs. transaction cost analysis of sharecropping, although he does not discuss the role of the family. Sally Griffen and Clyde Griffen (1977) 26Anil B. Deolalikar and Wim P. M. Vijverberg emphasize the role of family loyalty and (1983a) provide references to the literature and re- trust in business in nineteenth-century port evidence on the heterogeneity of family and nonfamily labor using district-level data from India. America. Discussing families' use of bank- Deolalikar and Vijverberg (1983b) report similar ruptcy laws, they write: findings using farm-level data from India and Malay- sia. In the Darwinian jungle of small business in 27 Rosenzweig and Kenneth I. Wolpin (1985), for the United States, survival frequently involved example, build a model of intergenerational transfers use of family relationships, founded in trust, around the "specific experience" hypothesis. to take advantage of loopholes in the law [p. 28 Binswanger and Rosenzweig (1982) view agri- 154]. cultural organization as a consequence of the inter- The family proved most useful in all of these play between asymmetric information and what they term the "material conditions of agriculture" (p. 58). Thus, they argue, differences in the charac- teristics of the technology from one crop to another family labor (pp. 31-35), they do not systematically have predictable effects on the organization of pro- examine the family as a solution to the problems duction. For example, with trees whose continued posed by asymmetric information in the context of value depends on pruning and maintenance (e.g., particular agricultural technologies. coffee, cocoa, apples) "an owner is unlikely to rent 29Nonfamily firms can and do attempt to provide out his trees to a tenant-operator in a contract whose incentives that bind managers to the firm and induce duration is less than the productive life of the tree, them to take a long view. Profit-sharing, for example, given the difficulty of assessing maintenance inten- gives managers an interest in the short-run perfor- sity in the short-run" (p. 47). On the other hand, mance of the firm, while pension plans and stock "coconuts do not require pruning" and "tenancy in options represent (among other things) attempts to coconut trees is quite frequent in India" (p. 49). Al- tie managers' rewards to the long-run performance though they recognize that family labor has both of the firm as a whole and their interests to the long- informational and incentive advantages over non- run interests of the firm.

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legal maneuverings because of trust between Although the transaction cost approach of- its members. Family members could betray fers a set of reasons why the efficiency and that trust-wives could leave their husbands innovativeness of family and nonfamily and parents could let their children remain stranded-but the assumption apparently was firms might differ, it does not offer unam- that they would not or, at least, that relation- biguous predictions about which will be ships outside the family would be even less more efficient or more innovative. Hence, trustworthy. The same need for trust and loy- a finding that family and nonfamily gover- alty in a mobile society undoubtedly accounts nance differ systematically in efficiency, for the frequency of family members in busi- ness partnerships in the city. No less than 48% innovativeness, or other behavioral of the firms ever run as partnerships in Pough- dimensions would not constitute a "test" keepsie brought together relatives at one time of the transaction cost approach.30 It or another [p. 156]. would demonstrate, however, its fruitful- Neoclassical theory obviates the need ness in suggesting interesting topics for for distinguishing between family and investigation. nonfamily governance by assuming that D. Assessment: Family vs. Nonfamily all firms are frictionless profit-maximizers. Governance Because of this theoretical presumption and the paucity of statistical data, econo- Family governance of economic ac- mists have virtually ignored family firms. tivities is likely to assure loyal and trust- The major exceptions fall into two sub- worthy performance; nonfamily gover- fields-development economics and eco- nance is likely to assure technical nomic history-but as a consequence of competence and skill. The relative impor- the limitations of theory and data, the tance of these sets of attributes varies from treatment of family firms is largely anec- society to society and from sector to sec- dotal. tor. The possible combinations are exhib- The transaction cost approach cannot ited in Table 1. One would expect family provide the data, but it does provide a governance to predominate in low-trust theoretical rationale for distinguishing be- environments (that is, in societies in which tween family and nonfamily firms and it nonfamily members are not expected to suggests that their behavior might differ perform honestly or reliably) and in sec- systematically. Two behavioral dimen- tors utilizing relatively simple technolo- sions in which comparisons seems espe- gies (that is, in sectors using technologies cially promising are efficiency and innova- which a high proportion of adults in the tion. Recently developed techniques for society are capable of mastering quickly).31 measuring the efficiency of firms (Finn R. Conversely, nonfamily governance would F0rsund, C. A. Knox Lovell, and Peter Schmidt 1980) could be used to compare the efficiency of family and nonfamily 30 The analysis proposed here is relevant for both family firms and family farms. firms in particular industries. It is often 31 Edward C. Banfield's The Moral Basis of a Back- asserted that family firms are technologi- ward Society (1958) explains the economic and polit- cally conservative and slow to exploit ical backwardness of southern Italy by "the inability of the villagers to act together for their common newly emerging profit opportunities; on good or, indeed, for any end transcending the imme- the other hand, it is also often asserted diate material interest of the nuclear family" (p. 10). that owner-entrepreneurs are more likely Banfield argues that this cultural ethos, which he terms "amoral familism," with its emphasis on the than professional managers to be innova- nuclear family rather than some larger group (e.g., tors. It would be interesting to know the extended family or nonfamily political, religious whether, controlling for firm size and for or social groups) is pathological (p. 163). He does not, however, discuss the forces that bind the nuclear industry, family firms are more or less family together, nor does he offer a convincing analy- likely to innovate than nonfamily firms. sis of the origins of amoral familism (p. 153-54).

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TABLE 1 ENVIRONMENT, TECHNOLOGY, AND ORGANIZATIONAL FORM

Simple technology Complex technology Low-trust environment family governance ?

High-trust environment both family nonfamily governance and nonfamily

governance

predominate in high-trust environments tional innovations such as the multidivi- and in sectors using complex technologies. sional or M-form firm, the conglomerate, In the case of high trust and simple tech- and the multinational corporation. Tech- nology, family and nonfamily governance nological innovations over the last two- may coexist. In the final case, low trust hundred years have increased minimum and complex technology, both family and efficient scale and thus favored nonfamily nonfamily governance encounter serious over family governance. Organizational difficulties, and neither form may be innovations have also favored larger units viable. The relative decline of family- by making it administratively feasible to based economic activities in advanced in- take advantage of technically feasible dustrial societies may reflect a shifting bal- economies of scale and scope. ance between the importance of their Decreases in the trustworthiness and re- characteristic advantages and disabili- liability of family ties also favor nonfamily ties-a secular movement from low-trust over family governance. Economists have and simple technology environments fa- tended to view the family as a harmonious voring family governance to high-trust unit and to regard conflict and discord as and complex technology environments fa- aberrations of little relevance for eco- voring nonfamily governance. nomic analysis. In the next section I con- This discussion and the corresponding sider issues related to the causes and table have focused on only one feature consequences of such conflicts. of the technology, its complexity, and only one feature of the environment, the reli- II. Internal Organization of Families ability and trustworthiness of nonfamily members, implicitly holding fixed other The family's internal organization is a features of the technology and the envi- determinant of its effectiveness as a gover- ronment. Another feature of the technol- nance structure for economic activities ogy, the minimum efficient scale of pro- and for distribution within the family. I duction, and another feature of the begin in Section A by examining marriage environment, the trustworthiness of fam- from a contracting perspective, emphasiz- ily members and the stability of family ing the difficulties of using contracts to ties, deserve further attention. structure complex, ongoing relationships. Like increases in complexity, increases In Section B I turn to allocation and distri- in minimum efficient scale favor market bution within the family, bargaining mod- governance over family governance. Such els of marriage, and the roles of marriage- increases may reflect technological inno- or family-specific capital. In Section C I vations or, as Williamson (1975, Chs. 8, discuss social exchange theory, arguing 9; 1981, Section 4) has stressed, organiza- that it is broadly consistent with ap-

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proaches emphasizing bargaining. Section fabric of society. "For bourgeois society D summarizes the case for bargaining marriage is the all-subsuming, all-organiz- models. ing, all-containing contract. It is the struc- ture that maintains the Structure. . ." (p. A. Marriage and Contract 15). For this reason ". . . the problem of transgressing the marriage contract . . . Individuals desire secure long-term is at the center. . ." of the late eighteenth- family relationships to provide a stable en- and early nineteenth-century novel (p. vironment in which to live and to rear 12). children and, in Becker's terminology, to Like Tanner, Lenore J. Weitzman reduce the risks associated with accumu- (1981) begins with Maine but she denies lating marital-specific or marriage-specific that his thesis applies to family law: ". . . capital.32 This requires an institutional marriage has not moved from status to structure that is both flexible enough to contract" (p. xix). The tension between the allow adaptive, sequential decisionmaking status and the contract views of marriage in the face of unfolding events and rigid is summarized in a recent family law case enough to safeguard each spouse against book by Walter 0. Weyrauch and Michael opportunistic exploitation by the other. B. Katz (1983): Marriage is a governance structure which, more or less satisfactorily, accommodates Maynard, Ponder, and Ryan relate to the these requirements. nature of marriage as seen in the light of Sir Henry Sumner Maine's famous statement, 'that In Ancient Law (1861) Sir Henry Sum- the movement of the progressive societies has ner Maine identified the progress of civili- been a movement from Status to Contract.' In zation with a movement 'from Status to legal practice this statement has never had the Contract. " He argued that modern society same significance it has had for scholarship, but is founded on obligations that individuals relational and contractual aspects of marriage create for themselves by voluntary agree- have lived side by side relatively undisturbed. These cases illustrate that legal practice can ments and promises rather than on obliga- live with and accommodate apparent contra- tions involuntarily and automatically im- dictions with ease. Maynard stands today for posed on them because of their status the proposition that marriage is something within the family. Maine's thesis provides more than a mere contract, that it is a status a starting point for several recent discus- or a relationship and, as such, subject to regula- tion by the government. sions of marriage. Tony Tanner (1979), for Ponder, on the other hand, . continues example, begins by quoting several long to be relied on for the seemingly opposite prop- passages from Maine and views adultery osition that marriage is contract rather than a against this background: ". . . adultery mere relationship, and that legislation regulat- can be seen as an attempt to establish an ing marriage could conceivably impair the obli- gation of contract if it affects vested rights.... extracontractual contract, or indeed an Maynard can be cited whenever an argument anticontract. . ." (p. 6) that threatens the in support of the police power of the state to regulate marriage is made, while Ponder can 32 Becker uses the phrase "marital-specific capital" be cited in support of the contractual autonomy to refer to capital that would be "much less valuable" of marital parties to regulate their own affairs. if the particular marriage dissolved (Becker, Landes In an extreme case this may be done within and Michael 1977, p. 338). "Children are the prime the same case, and Ryan demonstrates this ca- example, especially young children, although learn- pacity to draw from contradictory sources for ing about the idiosyncrasies of one's spouse is also support [p. 59]. important . . ." (Becker 1981, p. 224). Becker, Landes and Michael also include "working exclu- Firms do not marry, but transaction cost sively in the nonmarket sector" (pp. 1142, 1152), as marriage-specific capital. I return to marriage-spe- analysis argues that they often resort to cific capital in Section B. merger or vertical integration to avoid us-

This content downloaded from 128.252.111.81 on Fri, 04 Oct 2019 16:26:23 UTC All use subject to https://about.jstor.org/terms 596 Journal of Economic Literature, Vol. XXIII (June 1985) ing contracts to structure complex, ongo- wing, protection, and cover she performs ing relationships. Short-term contracts re- everything; and is therefore called . . . a femme-covert; and her condition during her quire frequent renegotiation, making it marriage is called her coverture.33 risky to accumulate capital whose value is contingent on the relationship continu- Thus under the eighteenth-century En- ing and discouraging investment in such glish common law the parallel between specific capital. Complete long-term con- marriage and merger was striking: the tracts which specify every possible contin- wife's legal personality was merged with gency are costly or impossible to write, and submerged in her husband's. a reflection of bounded rationality and Recent legal scholarship that empha- asymmetric information. Incomplete sizes the diversity of contracting modes long-term contracts which fail to specify provides a closely related analysis of these every possible contingency are perilous issues. Ian R. Macneil (1978) distinguishes because uncovered contingencies must be among "classical," "neoclassical," and "re- dealt with through bilateral negotiations lational" contracting.34 The classical para- under circumstances that may give one digm ignores any relationship between party or the other a strategic advantage. the parties other than that established by While the parties have some control over the contract itself: The parties' identities how complete their contract is to be, more are irrelevant, since they may be viewed complete contracts are relatively expen- as trading with the market rather than sive to write and relatively rigid to apply. with each other. The classical paradigm To avoid these contracting hazards firms thus adopts a discrete transactions view often rely on some more complete form that is very close to the economist's stereo- of integration such as merger. Since bu- type of contract law. Neoclassical and rela- reaucratic structures have their own char- tional contracting arose in response to the acteristic disabilities, internal governance difficulties of using contracts to structure does not eliminate all difficulties associ- complex, long-term relationships. Neo- ated with a transaction or exchange. Nev- classical contracting introduces a gover- ertheless, replacing a market relationship nance structure, often involving third- by an organization with an appropriate party arbitration, to reduce these hazards. governance structure often safeguards the Relational contracting goes a step further interests of both parties. in this direction by treating the ongoing Comparing marriage and merger calls relationship between the parties rather attention to the difference between indi- than the contract as central. Collective viduals and firms. When two firms merge, bargaining is the leading example. Thus, at least one of them loses its legal identity the disabilities of contracts for structuring and disappears. When two individuals complex, long-term relationships apply to marry, this is not the case, or, more pre- both commercial and personal contracts. cisely, this is no longer the case. Sir Wil- In Macneil's terminology marriage is a liam Blackstone (1765), describing mar- relational contract. The feature that riage under eighteenth-century common law, wrote: 33 After quoting this passage Weitzman (1981) goes on to quote Justice Black: "this rule has worked out in reality to mean that though the husband and wife By marriage, the husband and wife are one are one, the one is the husband" (p. 1). U.S. v. Yazell, person in law . . . [T]he very being or legal 382 U.S. 341, 359 (1966). existence of the woman is suspended during 34Williamson (1979) develops the implications of marriage, or at least is incorporated and consol- Macneil's analysis for the transaction cost approach. idated into that of the husband, under whose See also Macneil (1974, 1980).

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makes classical and neoclassical contract- cal and neoclassical contracting.36 This is ing inappropriate for structuring labor re- evident in labor law, where relational con- lations agreements-their inability to tracting is most fully developed: Special view specific disputes in the context of a rules and institutions have been created continuing relationship requiring adap- to circumvent the perceived defects of tive, sequential decisionmaking-makes classical and neoclassical contracting.37 them at least equally inappropriate for Treating marriage contracts "like any structuring marriage. Relational contract- other contract" is to treat them as classical ing provides a more instructive model. contracts. But marriage contracts, because Weitzman (1981) and others have re- they are relational contracts, do require cently urged that privately negotiated "special treatment": Dispute resolution marriage contracts be treated like other would require special rules and perhaps contracts, enforceable through the courts, special institutions.38 Privately negotiated but not accorded special treatment.35 The marriage contracts articulated through contracting analysis of Williamson and public rules and institutions that reflect Macneil draws attention to the range of society's values and mores might yield re- contracting modes and implies that rela- sults not very different from those ob- tional contracts, because they are likely tained through a system of family courts.39 to be less complete than other contracts,

are more dependent on legal rules and 36 Because all contracts are subject to certain gen- on institutions for their interpretation and eral rules of law, this distinction is one of degree. Although economists sometimes assume that con- articulation. This dependence on rules tracting parties are free to strike any mutually advan- and institutions signals a larger role for tageous bargain, this assumption is unwarranted: In the state, organized religion, or custom, the United States some contract provisions are unen- forceable because they have been prohibited by stat- and a correspondingly smaller role for the ute; others are unenforceable because the courts contracting parties than is typical in classi- have held them "contrary to public policy." 37These rules affect not only dispute resolution 35Weitzman describes marriage as a contract under existing collective bargaining agreements but whose terms are imposed by the state rather than also the conditions under which collective bargain- negotiated privately by the parties and examines the ing takes place in the absence of a prior contract terms of that state-imposed contract. She then offers or after the expiration of an existing agreement. Re- examples of privately negotiated marriage contracts cently some U.S. courts have held that, even absent and argues that such "intimate" contracts provide a collective bargaining agreement or an individual a means of redressing the sexual imbalance which contract, "employers cannot dismiss employees arbi- she believes remains present in family law and of trarily or in bad faith." In Europe protection against providing the certainty, clarity, and assurance that dismissal without cause is provided through legisla- are often absent in family courts. Her argument re- tion (William B. Gould 1982, p. 7). Clyde W. Sum- lies heavily on an analogy between personal relation- mers (1983) provides a brief overview in his intro- ships and business or commercial ones: Our legal 'duction to a recent symposium on "employment at system recognizes the advantages of allowing indi- will." Mark R. Kramer (1984, pp. 243-47) summa- viduals and firms considerable latitude in structuring rizes recent developments in this rapidly changing business relationships by privately negotiated con- area of the law. tracts; why not allow individuals similar latitude in 38 This would be true even absent children and structuring their personal, intimate relationships? the third-party effects associated with them. The This analogy provides some support for the use of presence of children provides a further rationale for contracts to structure personal relationships, but it state regulation of marriage and the family. also draws attention to the difficulties of doing so. 39As Becker (1981, p. 27, fn. 6) notes, Chinese, Privately negotiated contracts can increase individu- Japanese, and Christians have generally relied on als' abilities to determine the duties and obligations oral and customary rather than written marriage of their personal relationships. Using contracts to contracts. In Christian Europe marriage was histori- structure complex, long-term relationships, whether cally governed not by the state but by the Church commercial or personal, is intrinsically hazardous, through canon law and ecclesiastical courts. The Jew- however, and certainty, clarity, and assurance are ish marriage contract, the Ketuba, is traditionally not to be found in relational contracts. written. In Islamic law marriage is a civil contract

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B. Allocation and Distribution or a compromise between them. (Perhaps Ar- within Families row will produce a proof that such a consensus is impossible.) [p. 9]. Economists have considered three Samuelson goes on to consider what he models of allocation and distribution characterizes as "one extreme polar case within families: Samuelson's family con- of family organization": sensus model, Becker's altruist model, and recent bargaining models. Although these This family consists of two or more persons: models usually focus on husbands and each person consumes his own goods and has indifference curves ordering those goods, and wives, they also provide a framework for his preferences among his own goods have the examining relationships between parents special property of being independent of the and children. Samuelson's consensus other members' consumption. But since blood model, explicitly articulated in Samuelson is thicker than water, the preferences of the (1956), resolves the problem of intrafamily different members are interrelated by what might be called a "consensus" or "social welfare allocation and distribution by postulating function" which takes into account the deserv- a family social welfare function. Samuel- ingness or ethical worths of the consumption son begins by noting that "the fundamen- levels of each of the members. The family acts tal unit on the demand side is clearly the as if it were maximizing their joint welfare 'family'" (p. 9), and goes on to pose what function [p. 10]. he terms the "Mr. Jekyll and Mrs. Jekyll" While Samuelson's approach deter- problem: How can we expect family de- mines allocation and distribution within mand functions to obey any consistency the family, this is not his principal concern conditions? This question, a crucial one even in the section of "Social Indifference from the standpoint of revealed prefer- Curves" entitled "The Problem of Family ence theory, provided the motivation for Preference." His primary point is the logi- Samuelson's theory of intrafamily alloca- cal parallel between distribution in the tion: family and distribution in society. His sec-

Of course, we might try to save the conven- ondary point, crucial for demand analysis, tional theory by claiming that one titular head is that the Mr. Jekyll and Mrs. Jekyll prob- has sovereign power within the family and all lem can be finessed: The consensus or fam- of its demands reflect his (or her) consistent ily social welfare function approach pro- indifference curves. But as casual anthropolo- vides a rationale for treating family de- gists we all know how unlikely it is in modern Western culture for one person to "wear the mand functions as if they were indi- pants." It is perhaps less unrealistic to adopt vidual demand functions. But because the hypothesis of a consistent "family consen- Samuelson's "consensus" is postulated, not sus" that represents a meeting of the minds derived, his family is simply a preference ordering. Samuelson's concern is to keep gohn L. Esposito 1982, p. 16) but the parties' latitude the lid on the "black box," not to look to specify its terms is circumscribed (N. J. Coulson inside. 1964, pp. 189-91; Esposito 1982, pp. 23-24). The special legal rules and institutions governing The second model of allocation and dis- marriage and the family in the U.S. may be viewed tribution within the family is the altruist as society's response to the difficulties inherent in model articulated in Becker (1974, structuring such relationships. Four features deserve attention. A standard form marriage "contract" is 198 1).40 Becker, unlike Samuelson, is pri- imposed on the parties to avoid problems of over- marily concerned with intrafamily alloca- reaching and unconscionability; specialized courts tion. He begins by postulating that the are responsible for administering family law; courts generally refuse to intervene in ongoing marriages; and the legal system provides a complex and unsatis- 40 Becker (1973) proposes an alternative model of factory set of rules in the one area in which they allocation and distribution within the family in which cannot escape involvement: marital dissolution. outcomes are essentially determined by the market.

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family contains one "altruistic" member Bargaining models of allocation and dis- whose preferences reflect concern with tribution within families, developed inde- the welfare of the others.41 Becker then pendently by Manser and Brown (1980) argues that the presence of one altruist and by McElroy and Mary J. Horney in the family induces purely selfish but (1981), treat marriage as a cooperative rational family members to behave altruis- game.4445 These models do not require tically and that the resulting intrafamily that either spouse be altruistic, although allocation is the one that maximizes the one or both may be. Spouses are assumed altruist's utility function subject to the to have conflicting preferences and to re- family's resource constraint. He concludes solve their differences in the manner pre- that individual differences can be sub- scribed by some explicit bargaining merged and the family treated as a single model.46 The utility payoffs to the spouses harmonious unit with consistent prefer- if they fail to reach agreement-called ences, those of the altruist, without arbi-

trarily postulating Samuelson's family so- vant when the altruist does not have enough re- cial welfare function: "In my approach the sources to move the others to his preferred allocation 'optimal reallocation' results from al- by offering them an all-or-nothing choice. To see that Becker's solution does not follow from altruism truism and voluntary contributions, and alone, consider a family with two altruists. Alterna- the 'group preference function' is identi- tively, consider a family with one altruist and one cal to that of the altruistic head, even egoist, but suppose that the egoist has dictatorial power or that the egoist can offer the altruist an when he does not have sovereign power" all-or-nothing choice. Becker's result depends not (1981, p. 192, footnote omitted). on altruism, but on implicit assumptions about power or, equivalently, about the structure of the bargain- Becker's claims have been challenged. ing game. Marilyn Manser and Murray Brown (1980, 44 A cooperative game is one in which "the players p. 32) argue that Becker's conclusion de- have complete freedom of preplay communication pends not merely on the presence of an to make joint binding agreements"; a non-coopera- tive game is one in which "absolutely no preplay altruist but also on implicitly introducing communication is permitted. . ." (R. Duncan Luce a particular bargaining rule, the rule that and Howard Raiffa 1957, p. 89; emphasis in original). the household maximizes the altruist's Simone Clemhout and Henry Y. Wan, Jr. (1977) is the only paper I know that models marriage as a utility function. Manser and Brown are non-cooperative game. correct that Becker's analysis is seriously 45 Manser and Brown and McElroy and Horney flawed, although Becker is correct that his are specifically concerned with marriage rather than the family, but the analytical issues are similar. The result does not depend on the altruist hav- differences between models of allocation between ing sovereign power. Neither Becker nor husbands and wives and between parents and chil- Manser and Brown have analyzed the con- dren are twofold. First, marriage can be treated as a two-person game, while allocation between par- ditions under which Becker's results hold. ents and children may involve more than two players In addition to the dictatorial case, it also and, hence, raises the possibility of coalition forma- holds when the altruist is a player in an tion. Second, timing issues, which deserve more at- tention than they have thus far received in models asymmetric bargaining game in which of marriage, become crucial in models involving par- he can offer the others all-or-nothing ents and children. r.(knfes 42,43 46Alvin E. Roth (1979) provides a survey of alterna- tive bargaining models. Manser and Brown and McElroy and Horney consider the Nash solution 41 Becker's use of the term "altruism" differs from John F. Nash 1950) to the bargaining problem, and its meaning in sociobiology, although Becker (1976) Manser and Brown also consider the Kalai and claims they are closely related. Smorodinsky solution (Ehud Kalai and Meir Smoro- 42 And in which the others are not allowed to form dinsky 1975). Sharon C. Rochford (1984) analyzes coalitions. the implications for assignment or matching in the 43 Becker mentions that his result need not hold marriage market of a model in which allocations in the case of "corner solutions" (1981, pp. 191-92). within marriages are determined by Nash bargaining Under my interpretation, corner solutions are rele- with transferable utility.

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"threat points" in cooperative game the- Bargaining models explicitly embed the ory-play a dual role in bargaining mod- problem of intrafamily allocation and dis- els. They are essential both to determining tribution in a game-theoretic context, and the negotiation set-the set of utility pay- therefore they provide an intellectually offs which are Pareto optimal and individ- satisfying framework for addressing these ually rational (i.e., better for both parties issues. Game-theoretic models serve a than failing to reach agreements)-and to similar function in industrial organization: determining a particular solution, often a Posing the duopoly or bilateral monopoly unique solution, within the negotiation problem in game-theoretic terms does not set. In some bargaining models the threat resolve the difficulties inherent in model- point corresponds to the payoffs associated ing the interaction of two firms that recog- with clearly defined "next best" alterna- nize their mutual interdependence. For tives for each party; in a bargaining model both families and firms, however, the of marriage, for example, the next best game-theoretic formulation exposes the alternative for one or both spouses to re- fundamental nature of the analytical prob- maining in a particular marriage might lem. be becoming and remaining single. Usu- The transaction cost approach, although ally, however, the threat point corre- broadly consistent with the spirit of the sponds to the expected utility taken over bargaining models, implies that one-pe- some set of alternatives, for example, the riod bargaining models are seriously defi- expected utility associated with leaving cient. Neither adaptive sequential deci- the present marriage and searching for sionmaking, required to deal with new another spouse.47 information and unfolding events, nor a Bargaining models of intrafamily alloca- governance structure, required to protect tion, in contrast to Becker's model, em- each spouse against changes in threat phasize the role played by threat points points that strengthen the bargaining po- or alternatives in determining allocation sition of the other and leave the disadvan- and distribution within the family. Thus, taged spouse vulnerable to opportunistic investigating whether threat points or al- exploitation, has any place in one-period ternatives affect intrafamily allocation and models. Formulation of multiperiod bar- distribution may permit us to distinguish gaining models depends, however, on de- empirically between bargaining models velopments in the theory of cooperative and Becker's model.48 games.49 Focusing on opportunism and the need 47 In bargaining models the threat point almost for a governance structure that limits its never involves the threat of physical violence. Econ- omists' models of conflict, whether between hus- bands and wives or between workers and firms, sel- dom recognize even the possibility of violence. Ann ingly, all models give identical predictions in this D. Witte, Helen V. Tauchen and Sharon K. Long case. In Becker (1974, 1981) the negotiation set is (1984) summarize the sociological literature on fam- determined by the alternatives available to each ily violence, which distinguishes between "expres- spouse, but the altruist chooses the point in the nego- sive" violence (i.e., violence as an end in itself) and tiation set he prefers. Thus, unless the altruist "instrumental" violence (i.e., violence as a means chooses a "corner solution," changes in alternatives of coercion). They then propose a game-theoretic which do not eliminate the allocation chosen by the model in which violence and credible threats of vio- altruist from the negotiation set cannot force him lence can be instruments of social control and can to a less preferred allocation. Finally, there remains affect allocation within the family. the empirical problem of identifying threat points 48This is too simple. In the market-determined or alternatives. model of Becker (1973) alternatives outside the mar- 49 marriage is modeled as a non-cooperative riage completely determine allocation within mar- game, then the multiperiod formulation is a super- riage. That model, however, implies a negotiation game in which the constituent game changes from set which reduces to a single point and, not surpris- one period to another.

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scope allows us to understand better the creases the "divorced payoff"-the payoff dual role of family- or marriage-specific associated with leaving the marriage and capital. Marriage-specific capital is defined starting work in the market sector.52 by two characteristics: It increases pro- The relative importance of the married ductivity in the household and it is worth- payoff and divorced payoff depends on the less if the particular marriage dissolves.50 rates at which marriage-specific and mar- Thus, other things being equal, an in- ket human capital accumulate. There are crease in marriage-specific capital widens two polar cases. In the first, productivity the gap between remaining in a particular in the home depends on the accumulation marriage and leaving it, either to become of marriage-specific human capital while and remain single or to search for a better wages are independent of experience in marriage. By widening this gap the accu- the market sector: In this case, working mulation of marriage-specific capital stabi- exclusively in the nonmarket sector affects lizes the marriage and reduces the risk marital stability and intrafamily allocation of further investment in productive mar- only by increasing the married payoff; the riage-specific capital.51 divorced payoff at a given future date will Becker, Landes and Michael (1977, p. be the same regardless of whether the in- 1142) characterize "working exclusively tervening period has been spent exclu- in the nonmarket sector" as a form of mar- sively in the nonmarket sector. In the sec- riage-specific investment. This character- ond polar case, productivity in the home ization fails to recognize the two distinct is independent of experience in the non- channels through which working exclu- market sector while wages depend on ac- sively in the nonmarket sector affects both cumulated experience in the market sec- marital stability and intrafamily allocation. tor: In this case working exclusively in the Working in the home creates nontransfer- nonmarket sector affects marital stability able skills that increase productivity in the and intrafamily allocation solely by de- marriage; these skills represent marriage- creasing the divorced payoff; the married specific capital which increases the payoff payoff will be the same regardless of associated with remaining in a particular whether the intervening period has been marriage. But a decision to work exclu- spent exclusively in the nonmarket sector. sively in the nonmarket sector is also a In this second case working exclusively in decision not to acquire market human the nonmarket sector involves no accumu- capital. Thus the effects of such a decision lation of marriage-specific human capital. on the payoffs are twofold: Because mar- Between these poles lies a continuum of riage-specific capital has been accumu- cases in which marriage-specific capital lated, it increases the "married payoff"- and market capital both accumulate at the payoff associated with remaining in nonzero rates. It is an unresolved and vir- the marriage; and, because market human tually unexplored empirical issue whether capital has not been accumulated, it de-

52 The bases for these comparisons are the payoffs 50 In some respects a spouse acquiring marriage- that would be realized at a particular future date specific capital is analogous to a worker acquiring in each of the two states-remaining in the marriage firm-specific human capital. A major difference is and leaving it-if the individual had not worked ex- that in labor markets workers are protected by the clusively in the nonmarket sector. The married pay- firm's need to maintain its reputation so it can hire off refers to the total to be divided between the workers in the future, while in marriage markets spouses; in a bargaining model the division of this this protection is attenuated. total depends on the threat point (i.e., the divorced 51 Becker is well aware that marriage-specific capi- payoff). The "total to be divided between the tal plays both of these roles (Becker, Landes and spouses" is a problematic notion without special as- Michael 1977, p. 1152; Becker 1981, p. 224). sumptions such as transferable utility.

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working exclusively in the nonmarket sec- sociated with remaining in the marriage tor increases marital stability primarily by reflects the "productivity" of children as increasing marriage-specific capital, thus sources of satisfaction in the intact mar- increasing the married payoff, or primar- riage. The reduced payoff associated with ily by failing to increase market capital, leaving reflects the role of children as thus decreasing the divorced payoff.53 "hostages. "57,58 Becker, Landes and Michael (1977, p. The transaction cost approach suggests 1152) also characterize children as mar- a number of empirically implementable riage-specific capital "since one parent research projects on allocation within the usually has much less contact with the family-between husbands and wives, be- children after dissolution."54 This charac- tween parents and children, and among terization is misleading for two reasons. children. Allocation between husbands First, unlike marriage-specific capital, and wives is difficult to investigate empiri- children do not disappear when a mar- cally because of the pervasiveness of pub- riage dissolves; typically one parent or the lic goods within the household. Neglecting other is granted custody of the children. corner solutions, Becker's altruism mod- The observation that one parent usually el implies that the allocation between has much less contact with the children spouses depends on the sum of their re- after dissolution suggests that children are sources, but not on each spouse's individ- like public goods within the marriage, not ual wealth, income, and earning power that they are marriage-specific capital. except as they affect this total: The al- Second, like working exclusively in the truist's utility function is maximized sub- nonmarket sector, children increase the ject to the family's resource constraint. payoff associated with remaining in a mar- The transaction cost approach, like the riage and reduce the payoff associated bargaining models, suggests that the allo- with leaving it.5556 Hence, the presence cation between spouses depends system- of children affects both marital stability atically on the individual wealth, income, and intrafamily allocation through two and earning power of the spouses as well distinct channels. The increased payoff as- as on their sum. Although the transaction cost approach does not imply a specific

53 Marriage-specific capital is, by definition, idio- syncratic to a particular marriage. The discussion 57 Williamson (1983) discusses the use of hostages could be generalized, however, to consider the role to lend stability to bilateral governance structures. of human capital which is specific to the household He argues that reciprocal selling arrangements and sector but not to a particular marriage. This distinc- product exchanges among rival firms, practices usu- tion is analogous to that in the labor market literature ally condemned as anticompetitive, under certain between firm-specific and industry-specific human conditions may represent exchanges of hostages that capital. facilitate socially beneficial trading. 54 Becker (1974, p. S23, fn. 36) notes that children 58The hostage effect has two components. The first "would be a specific investment if the pleasure re- is psychological: Even if leaving a marriage with chil- ceived by a parent were smaller when the parent dren entailed no financial obligations, leaving such was (permanently) separated from the children." a marriage would be different from leaving a child- 55 Pollak and Wachter (1975, p. 273-76) criticize less marriage. The second is financial: To the extent the new home economics literature for failing to dis- that parents retain child support obligations after tinguish between "household production processes" leaving a marriage, the payoff to leaving a marriage that produce observable and measurable commodi- with children is less than the payoff to leaving a child- ties and those that produce "satisfaction" or unmea- less marriage. These costs may be magnified if there surable commodities such as "child services." are "economies of scale in consumption" that are 56 Utility payoffs to each spouse in the event of lost with dissolution. The financial effect on the pay- dissolution are conceptually unambiguous. Utility offs of the parents depends on the extent to which payoffs to each spouse when the marriage remains child support is borne by the state and how the por- intact presuppose a particular solution to the prob- tion of it not borne by the state is divided between lem of distribution within marriage. the parents.

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bargaining model, by viewing marriage as cult to obtain, in the long run data avail- a governance structure which permits ability is endogenous. Data collection by some flexibility while protecting the par- government agencies or by individual re- ties against the hazards of unconstrained searchers-a practice less common in eco- bilateral bargaining, it does suggest that nomics than in other disciplines-depends alternatives and threat points affect alloca- in large part on the apparent demand for tion within marriage. such data by the research community. Direct econometric implementation of C. Social Exchange Theory any model of allocation within marriage depends on identifying and measuring Social exchange theory, a framework goods, commodities, or activities desired developed by sociologists and social histo- by one spouse but not the other.59 For ex- rians which draws heavily on economics, ample, contributions of husbands and has been used to analyze a wide range wives to their respective undergraduate of social phenomena, including intra- colleges are likely to fall into this category. family allocation. Or, if either or both spouses have children Greven's Four Generations (1970), a by previous marriages, then the consump- study of colonial Andover, explains the tion of these children or expenditures on changing relationships between succes- their education are likely to be of more sive generations in terms of changing eco- interest to the children's parent than to nomic opportunities and alternatives: the other spouse: An uncluttered case would be one in which a widow with chil- With abundant land for themselves and their off-spring, the first generation established ex- dren married a widower with children. tended patriarchal families, in which fathers Using data from a developing country, one maintained their authority over their mature might investigate whether the nutrition sons, mainly by withholding control over the of a child in such a family depended only land from them until late in their lives. The on the family's total resources or whether delayed rmarriages of sons testified to their pro- longed attachment to paternal families . . . [p. those of the child's parent had an indepen- 268]. dent effect on the child's consumption. Us- ing contemporary U.S. data, one might Greven argues that age at marriage is a investigate whether the educational at- sensitive indicator of the assumption of tainment of a child depended only on the adult status and responsibility (pp. 31-32), new family's total resources, or whether that marriage required parental support the resources of the child's parent had a (p. 75), and that the first-generation fa- systematic, independent effect. Although thers retained legal control of their lands the data needed to estimate models based until their deaths (p. 78). In the middle on the transaction cost approach are diffi- decades of the eighteenth century, the fourth generation "married younger, es- 59Empirical implementation need not be either di- tablished their independence more effec- rect or econometric. At least two other strategies tively and earlier in life, and departed are available. The first, which I have already dis- cussed, is indirect and focuses on the implications from the community with even greater of the transaction cost approach for marital stability, frequency than in earlier generations" (p. labor force participation, or other variables for which 272). Many sons in the fourth generation data are widely available. The second is direct but non-econometric and uses qualitative rather than acquired land from their fathers by deeds quantitive evidence. Appealing to narrative case of gift or sale during the father's lifetime, studies does not solve the problem of econometric rather than by bequest at the father's implementation, but challenges the importance of doing so by implicitly raising the question of what death (p. 241). types of evidence are admissible in economics. Greven explains these changes in terms

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generally consistent with a bargaining change theory foundation of Anderson's framework in which threat points (i.e., al- analysis is consonant with a bargaining ap- ternatives or opportunities) play a signifi- proach, and the two additional consider- cant role: ations he introduces, timing and uncer- tainty, suggest modifying social exchange A combination of circumstances probably fos- tered the relatively early autonomy of many theory in the same general directions as fourth-generation sons and encouraged their transaction cost analysis suggests modify- fathers to assume that their sons ought to be ing bargaining models. on their own as soon as possible. The rapid ex- Anderson documents the effect of chil- pansion of settlements and the emigration of dren's employment opportunities on their many third-generation Andover men had am- ply demonstrated the opportunities which ex- relationships with their parents: isted outside Andover for those willing and able ... children's high individual wages allowed to leave their families and begin life for them- them to enter into relational bargains with selves elsewhere. The diminished landholdings their parents on terms of more or less precise of many families and the constantly rising equality. If, as was usually the case, a bargain prices of land in Andover during the first half could be struck which was immediately favour- of the century also put great pressure upon able to both parties, then all was well, and the sons who wished to remain as farmers in And- relationship continued, though the degree of over and made it imperative that many sons commitment to such a relationship must often take up trades instead or move elsewhere for have been low. If a better alternative was ob- the land they needed [p. 222]. tainable elsewhere the child could take it. The If patriarchalism was not yet gone, it had contrast between the choice element in these been made less viable by the changing circum- relationships between urban children and their stances. The earlier economic basis which had parents, and the situation in rural areas . . . is sustained the attempts by fathers to establish very marked. In the rural areas even in the and to maintain their control and influence short run, child and father entered a bargaining over the lives of their sons no longer was to situation with the child at a very considerable be found among the majority of families living disadvantage, because the father had complete in Andover. Only the wealthy and only those control over the only really viable source of with sons who were willing to accede to their income [pp. 131-32]. fathers' wishes regarding the possession and ownership of the land could still consider them- Summarizing his findings, Anderson selves to be patriarchs [p. 273]. writes: . . .one crucial way in which urban-industrial Anderson (1971) utilizes an explicit con- life in the nineteenth century affected family ceptual framework for analyzing the im- cohesion was by offering to teenage children pact of urbanization and industrialization wages at such a level that they were able to on family structure in nineteenth-century free themselves from total economic depen- Lancashire. His framework is an elabora- dence on the nuclear family. Because norma- tive controls were weak and because housing, tion of "social exchange theory," which food, and other day to day necessities could postulates that individuals engage in ex- be obtained on the open market, many could change to maximize "psychic profit."60 . . .live as well or better than they could with Anderson, however, stresses two consider- kin or parents. Some children did desert their ations that exchange theory neglects: families and I have presented some evidence which suggested that even where they did not whether reciprocation is immediate or in do so many children were conscious of the exis- the distant future, and whether reciproca- tence of this possibility and the alternatives it tion is certain or uncertain (p. 9). The ex- offered, and used it as a way of bargaining a highly independent relationship with their 60 The basic social exchange theory framework is families [p. 134]. borrowed from social psychology. The seminal works Social exchange theory provides an ana- are George C. Homans (1961) and Peter M. Blau (1964); for an analytical survey and references to lytical framework for sociology and social the literature see Anthony F. Heath (1976). history which appeals strongly to econo-

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mists; its appeal to sociologists and social A bargaining approach to intrafamily al- historians is somewhat less powerful. For location is required because negotiatioii example, Michael Katz (1975), a social his- sets in ongoing marriages are often large torian, contrasts Anderson's work on nine- and because intrafamily allocation cannot teenth-century Preston with his own anal- be resolved at the outset. The emergence ysis of nineteenth-century Hamilton, of a surplus in ongoing marriages can be emphasizing the narrowness of Ander- ascribed to the accumulation of idiosyn- son's exchange theory approach. He ar- cratic or marriage-specific capital or, gues that it "constricts the range of human more simply, to a random process in motivation," and "it assumes a greater de- which marriages with empty negotiation gree of rationality than probably underlies sets dissolve while those with nonemp- ordinary behavior" (p. 302).61 ty negotiation sets continue. Because bounded rationality precludes complete D. The Case for Bargaining Models long-term contracts which specify intra- Even without the contracting prob- family allocations under every possible lems emphasized by the transaction cost contingency, intrafamily allocation must approach, bargaining models would often be dealt with in an adaptive, sequential be required to analyze intrafamily alloca- way-in short, through bargaining. tion. There are three exceptions: (1) there is a family consensus on resource alloca- III. Conclusion tion, (2) some "altruistic" family member has the power to choose an allocation from Although the metaphor of household the negotiation set and impose his choice production can usefully be applied to a on the others, and (3) the negotiation set wide range of activities, the formal frame- is a single point, so there is no surplus over work of the household production model which to bargain. Virtually any other cir- is best suited to analyzing processes that cumstances require a bargaining analysis combine household time and purchased to determine an equilibrium allocation inputs to produce well-defined and mea- within the negotiation set. surable outputs. The family's role in many The negotiation set corresponding to a economic activities, however, is explicable particular marriage depends on the next- not in terms of technology but of gover- best alternative of each spouse. When the nance. negotiation set is small, determining an The transac-tion cost approach provides equilibrium allocation within it becomes a new perspective on families and house- uninteresting: The well-being of each holds. Unlike the new home economics, spouse is essentially determined by the which focuses exclusively on household negotiation set, not by bargaining within production, it recognizes the importance the marriage to determine an allocation of household organization and family within the negotiation set. In the limit, structure. The transaction cost approach when the negotiation set shrinks to a sin- views marriage as a "governance struc- gle point, the well-being of each spouse ture," emphasizes the role of "bargaining" is uniquely determined by his or her alter- within families, and draws attention to the natives outside the marriage.62 advantages and disadvantages of family organization in terms of incentives and 61 Katz also argues that Anderson's theory "is not monitoring, and to the special roles of "al- supported by the data in his book" (p. 302). truism" and "family loyalty." It also recog- 62The limit is a limit for the marriage to continue. If the bargaining set is empty, the marriage will pre- nizes the disadvantages of family gover- sumably dissolve. nance: conflict spillover, the toleration of

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inefficient personnel, inappropriate ability BENEDICT, BURTON. "Family Firms and Economic match, and inability to realize economies Development," Southwestern J. Anthro., Spring 1968, 24(1), pp. 1-19. of scale. If activities are assigned to institu- BEN-PORATH, YORAM. "The F-Connection: Families, tions in an efficient or cost-minimizing Friends, and Firms and the Organization of Ex- fashion, the balance of these advantages change," Population Devel. Rev., Mar. 1980, 6(1), pp. 1-30. and disadvantages plays a major role in . "Economics and the Family-Match or Mis- determining which activities are carried match? A Review of Becker's A Treatise on the out within families and which are per- Family," J Econ. Lit., Mar. 1982, 20(1), pp. 52- 64. formed by firms, nonprofit institutions, or BINSWANGER, HANS P. AND ROSENZWEIG, MARK R. the state. "Behavioral and Material Determinants of Produc- A principal defect of the transaction tion Relations in Agriculture." Research Unit, Ag- riculture and Rural Development Department, cost approach is its failure to provide a Operational Policy Staff, World Bank, Report No.: structure for rigorous econometric inves- ARU 5, June 1982. Revised, Oct. 5, 1983. tigations. Developing such a framework _ . "Contractual Arrangements, Employment and Wages in Rural Labor Markets: A Critical Re- requires incorporating the insights of the view," in Contractual arrangements, employment transaction cost approach into formal and wages in rural labor markets in Asia. Eds.: models and specifying such models in suf- HANS P. BINSWANGER AND MARK R. ROSEN- ZWEIG. New Haven: Yale U. Press, 1984. ficient detail to permit estimation. The BLACKSTONE, SIR WILLIAM. Commentaries on the present essay represents a first step to- laws of England. Oxford: Clarendon Press, 1765. ward that goal. BLAU, PETER M. Exchange and power in social life. NY: John Wiley & Sons, Inc., 1964.

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