Therefore, in equilibrium, the aggregate consumption for household h is (χ,y) = (δ, 2).
The associated individual shares are
σ
x 1 = -----x = σ ;
σ+τ
τ
x 2 = -----x = τ ;
σ+τ
_ σ* _ 1 σ*
y1 *-* I *y y O *-* I — * ;
σ + τ* 2 σ* + τ*
_* λ-*
τ 1τ
y2 = σ* + τ* y = 2 σ* + τ* ’
As a function of α, consumer 1 achieves
u 1 = -1 μ 1 )1 -γ1 μ σ*+τ* )1- 1
γ1 α
= const 1 ∙ α 1 -----------------—
1 - γ2 - (γ1 - γ2)α
which is increasing in α. Consumer 2 achieves
1-γ2
u2
τγ2
const2 ∙ (1 -α )γ 2 μ -—τ1—α—r )
1 - γ1 - (γ2 - γ1)(1 - α)
which is decreasing in α. Hence a shift of bargaining power from consumer 2 to con-
sumer 1 benefits consumer 1 and harms consumer 2, who ends up consuming less of
both commodities.
□
Proof of Proposition 3
Good ` serves as a nume´raire so that the price system assumes the form (p1 , . . . , p`-1, 1).
We consider the first-order conditions of maximizing Sh in household h:5
1 ∂ uh1
αh~jJ ~0~- λh pk = 0, k = 1, ■ ■ ■ , ' - 1;
Uh1 ∂xh1
αh~rτ λh = 0;
Uh1
(1 - αh )— ∙ -—k λh pk = 0, k = 1, ■ ■ ■ , ' - 1;
Uh2 ∂xkh2
(1 - αh)~j~τ--λh = 0■
Uh2
5 Note that our assumption of sufficient endowments with the num´eraire good in all households
allows us to work with the entire set of first-order conditions.
29
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