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Many people erroneously perceive Adam Smith as the first economist which is an understandable error. However, adorning him with the title of the grandfather of political economy may be more appropriate. Contrary to this widespread misnomer, Smith was a moral philosopher who happened to stumble across this (at the time) new subdiscipline. Many have forgotten the names of the economists that predated Smith that had a profound influence upon his work, names such as Turgot and Cantillon. The legacy of economics has its origins prior to the heyday of the French physiocrats, but rather in ancient Greece. Beginning with the ruminations of Aristotle, the discipline of economics was born. Aristotle’s application was slightly more atypical than our current interpretation of this subject of study. More focused on the finer points of household management, talk about microeconomics. A far cry from the intricate conversations about GDP, CPI, etc. that dominates the contemporary study of economics.

Around the 1970’s economists at the University of Chicago formulated what has become known as family economics. More of a modern adaptation of the Aristotelian take on economic matters, applying allocation of resources, division of labor, and even game theory to the family dynamic. One of the preeminent founding theorists of this academic movement was Nobel winning economist Gary Becker. Becker synthesized analysis of resource allocation within families known as the Rotten Kid Theorem back in 1974.  Becker’s theory postulates that if the head of the household is altruistic and evenly distributes finical incentives to all dependents, even “selfish” children will be more apt to be civil with their siblings (page 19) [2]. In an abstract sense, the “love” of the head of the household is “economized” through the allocations of incentives acting as the “invisible hand” (page 19) [3]. This premise operations under the assumption that the parent has “… perfect knowledge about the welfare of their children…” and is finically stable [4]. Clearly demonstrating how the reflection of love and care can be loosely quantified through the manifestation of gifts and money. While not a perfect means of measuring an intangible state of being such as “love” it is a novel means of approaching the problem.

Becker’s theorem is certainly novel, however, that does not mean that it is immune from criticism. Much like another academic postulation, there is a litany of detractors who aim to invalid it. There are several specific conditions that need to be met for the theorem to be applied. Many of which are improbable under realistic conditions (Page 2) [5]. Encountering such a conundrum really isn’t that surprising considering in most economic schools’ theorems operate in hypothetical models. Models that control for extraneous variables that are prevalent in actual economic behavior. Creating a certain sense of unpredictability. Since most social organizations (families included) operate as a complex system comprised of many moving parts (family members) it would be impossible to anticipate every specific outcome. Hence why in actual practice Becker’s theorem may struggle to retain legitimacy in actual practice. The predictions of an academic model cannot fully mimic the actual vicissitudes and conditions of reality.

Economist Theodore Bergstrom has arguably more thoroughly fleshed out the deficits of the Rotten Kid Theorem than anyone else in the field. Bergstrom has established three core contingencies where the theorem would be inapplicable. Each of the three considerations drills into some of the overlooked blind spots in Becker’s theorem. The insights of The Case of the Lazy Rotten Kids, The Case of the Controversial Night-Light, The Case of the Prodigal Son exposes some of the shortcomings of the Becker’s theorem. I will expand upon the specified considerations.

One of the more direct failures of the Rotten Kids Theorem is The Case of the Lazy Rotten Kids which is self-explanatory. The title conveys the major principle behind this concept. Essentially, this illustrates an instance where material incentives do not entice the child. In this scenario the children prefer leisure to material goods, nullifying the value of material gifts.

“ … selfish child will have insufficient incentive to work since he will not receive the marginal product of an extra bit of effort but only this marginal product of an extra effort but only mariginal product times the household head ‘s marginal  propensity to spend on him… ” (Page 3). [6]

In other words, the utility of obtaining gifts from their parents is outweighed by the disutility of exerting the effort to help around the house. From the standpoint of Marginal Utility theory actually makes sense. Individuals vary in their preferences for labor/leisure and consumption schedules. If the individual child values leisure innumerably higher than material goods no number of toys or treats can be of use in persuading them.  This insight isn’t merely regulated to children, but to adults as well. Explains why some individuals prefer more demanding occupations with higher wages and some people opt for less intense work and lower wages. To be honest, it is kind of erroneous to not account for individual differences. In actual application, the preferences of individuals do not remain static nor stay the same from person to person. Even circumstances and the gift itself can influence whether the child is compliant.

A more indirect scenario in which the Rotten Kid Theorem would prove to be invalid would be The Case of the Controversial Night-Light. The circumstances of this contingency are there is a husband who enjoys reading at night and utilizes a night-light. This disrupts the sleep of his wife, so he, therefore, reads less at night. Per Becker, the wife is “entirely selfish” even in light of the material goods her husband provides her (Page 5) [7]. Unfortunately, his concession was not sufficient for his wife. The wife opts to have an electrician to disconnect the night-light permanently damaging it. While the husband will not directly attribute the incident to the wife, she will be worse off as the loss of the night-light counts as a detriment to the total family income. Inferring the expense of replacing the night-light. Which we can deduce will result in less material gifts for his wife. Not necessarily, so.  After conducting a deeper mathematical analysis of the situation (adjusted utility functions and all) he found that Becker’s conclusion to be faulty. Bergstrom found that the amount of night-light consumption permitted by the wife to be independent of how much money the husband opted to allocate in the form of gifts. The husband:

“could bribe the wife to let him read, but is not an automatic incentive for the wife to choose a Pareto-optimal amount of public good without an explicit bargain being struck…” (Page 7) [8].

Considering the lack of connection between the use of the described public good and the husband’s decision to allocate resources illustrates fault on Becker’s end. An understandable error. One can logically deduce that constrictions one facet of the family budget would have repercussions reverberating out.

The final set of parameters that could potentially invalidate the Rotten Kid Theorem would be The Case of the Prodigal Son. The main fallacy being how the incentives are distributed to the selfish child. If the child is given an amount of monetary incentive that can be consumed or saved for a later date. If it is known that a second gift will be provided at a later date and “if the parent does not make a pre-commitment punish profligate first-period behavior, the kid typically has an incentive to overspend in the first-period” (page 7) [9]. The child will attempt to game the system by spending all but one dollar in the first period and spend too little in the second period.  Please note that Bergstrom states, “too little” and “too much” from the metric of Pareto efficiency of the household.

Overall, while it is easy to find flaws in the Rotten Kid Theorem it is equally as effortless to also commend it. The evident flaws don’t produce a shut-and-closed case for condemning it has a faulty theorem. Even if you find little redeeming value in the theorem it was a ground-breaking concept that paved the way for future family economics theorists. Personally, I must give credit for creativity on Becker’s part as this is truly a unique theory. Prior to Becker, no one has attempted to reflect upon how the allocation of resources worked in the dynamic of a household. Provided the insight that incentives are aligned along the lines of receiving financial support from the head of the household. How it could theoretically influence the level of cooperation among other members of the household. The more you contemplate this aspect of family relations the more plausible Becker’s theorem appears to be. If the marginal utility can be applied to the workplace, consumer economy, etc. why not in the household? If individuals can have personalized objectives in goals one group dynamic it is most likely can be extrapolated to other circumstances. Becker certainly got the ball rolling on analyzing incentives in the family environment.

 

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