Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium IVIember Libraries http://www.archive.org/details/publicpolicyexteOObert OEWEV Massachusetts Institute of Technology Department of Economics Working Paper Series PUBLIC POLICY AND EXTENDED FAMILIES: EVIDENCE FROM SOUTH AFRICA Marianne Bertrand j Sendhil Mullainathan Douglas Miller Working Paper 01-31 March 2001 Room E52-251 50 Memorial Drive MA Cambridge, 02142 This papercan be downloaded without chargefrom the Social Science Research Network Paper Collection at http://papers.ssm.com/abstract=xxxxxx Massachusetts Institute of Technology Department of Economics Working Paper Series PUBLIC POLICY AND EXTENDED FAMILIES: EVIDENCE FROM SOUTH AFRICA Marianne Beitrand Sendhil Mullainathan Douglas Miller Working Paper 01-31 "" March 2001 Room E52-251 50 Memorial Drive MA Cambridge, 021 42 This paper can be downloaded without charge from the Social Science Research Network Paper Collection at http://papers.ssm coiTi/abstract=xxxxxx . MASSACHUSElTSlISTrnJTr OFTECHNOLOGY LIBRARIES J Public Policy and Extended Families: Evidence from South Africa Marianne Bertrand (University of Chicago GSB, CEPR and NBER) Sendhil Mullainathan (MIT and NBER) Douglas Miller (University of California at Berkeley)* March 27, 2001 Abstract How are resources allocated within extended families in developing countries? To investigate this question, we use a unique social experiment: the South African pension program. Under that program, the elderly receive a cash transfer that represents roughly twice the per capita African income. We ask how this transfer affects the labor supply of working-age individuals living with these elderly. We find asharp drop in the workinghours oftheprime-ageindividuals in these households when elder women reach 60 years old or elder men reach 65, the respective ages for pension eligibility. We also find that the drop in labor supply is much larger when the pensioner is a woman, suggesting an imperfect pooling ofresources. The allocation ofresources among prime-age individuals depends strongly on their absolute age and sex as well as on their relative age. The oldest son in the household reduces his working hours more than any other prime-age household member. The large labor supply response we observe raises important issues for the design of social policy programs in developing countries and also lead us to be wary ofany model of intra-household allocation ofresources that does not fully account for the endogeneity ofearned income. *We axe extremely grateful to Abhijit Banerjee, Anne Case, .Angus Deaton, Esther Duflo, Jon Gruber, Michael Kremer, Jonathan Morduch, and Jim Poterba. We have also benefited from feedback by seminar participants at the MIT Public Finance Lunch, Princeton Development Workshop, Har\-ard-MIT Development Seminar, and the NBER Summer Institute 2000. Miller acknowledges financial support from the National Science Foundation's Graduate Fellowship Program, e-mail: [email protected]; [email protected]; [email protected] 1 Introduction In many developing countries, large extended families often live together. Shared housing may suggest sharing of other resources, most notably money. If such resource sharing is prevalent, social policies may produce unexpected effects. A transfer targeted at one demographic group may eventually find itself in the pockets of relatives living in the same house. Who in the end benefits from the transfer will depend on the sharing rules in place between the targeted group and other family members. In this paper, we attempt to understand how resources are transferred in extended families.^ To do this, we investigate a unique policy in South Africa: the old age pension program.' Under this program, women over the age of 60 and men over the age of 65 receive what in practice is a very large lump sum cash transfer, roughly twice the average per capita income in African households.^ The magnitude ofthe transfer makes it a useful "experiment," permitting us to track the flow of money more cleanly thair more marginal changes would allow. Does the pension money eventually reaches family members other than the pensioners? If yes, how much of the cash is transferred and which family members receive most of it? To address these questions, we study the labor supply of relatives living with pensioners. We focus on labor supply for two reasons. First, typical household survey data do not usually allow one to directly measure the transfers each family member receives. Our data is no exception. Expen- diture data measure consumption at the household, not individual level. Only a few consumption A large literature has examined resource transfers in the close family (husband and wife or parent and young child). Lundberg and Pollak (1996) provide a survey. In the close family, one can reasonably assume that resource transfers do take place, for example between parents and young children. The rare evidence we have on resource transfers in theextendedfamily comes from the U.S. (Altonji et al, 1992) and suggests that resource transfers are not large in that case. It is an open question whether such findinggeneralizes to developingcountries where the extended family often live under a common roof. "In theory, the transfer program is means-tested but this has little effect in practice for Africans whose income is quite low relative to the test. See Section 2. items are exclusive enough that they can be matched to a specific sex or age group.^ Leisure time, however, is a good that can easily be assigned (Chiappori 1992). By examining labor supply, we can infer (at least partly) how the pension money is allocated to the various prime-age individuals in a household. Second, a labor supply response would most clearly underline the unexpected outcomes caused by family redistribution. Since the social pension targets a group who by and large is already out of the labor force, and conditions mainly on an unalterable variable, age. we might expect it to have little effect on labor supply in the economy.'* On the other hand, if intrahousehold redistribution occurs, aggregate labor supply may fall as the working-age individuals that live with pensioners reduce their hours of work. How large such an aggregate effect will be directly depends on the direction and strength of redistribution flows inside households. Anecdotal evidence and newspaper articles hint that the pension may well have affected rela- tives' labor supply. One article mentions that "the impact ofpensions on communities with a high rate of unemployment was huge, as multi-generation households formed a constellation around the person receiving the pension" (Ngoro, 1998). Another describes a pensioner's "five children, who also live with him in his two-bedroom flat, contribute to the family income when they can find work. But none has a full-time job" (Caelers, 1998). Of course, such stories do not constitute causal evidence, but they provide a backdrop for our statistical work below. To identify the eff'ect ofthe pension, we will exploit the non-linearity in pension eligibility rules: only men over 65 and women over 60 can in theory receive a pension. Our strategy uses this sharp Subramanian and Deaton (1991) use expenditures on adult goods such ;\s alcohol and tobacco to study discrimi- nation based on children's gender. Browning et al. (1994) use expenditures on men's and women's clothing to stydy sharing rules between couples. A labor supply effect might arise because the pension increases the expected future income of the young. But this would affect all the young equally, not merely the relatives of pensioners as our results suggest.