The Effects on Demonetization on Women

An article on the effects of demonetization on Indian women is discussed and connected to the household bargaining model. By the ECON 416 TA


On November 8th, 2016, Prime Minister of India Narendra Modi announced that all existing Rs 500 and Rs 1,000 notes in circulation would be invalid within four hours. While the old notes could be exchanged at banks for currency through November 25th or deposited into bank accounts until December 30th, the prime minister’s announcement kicked off an economic shock that has affected most Indian households. This is policy shock and its effects on Indian women in poor and rural areas is the focus of Nishita Jha’s article “Note demonetisation: What of the women who hide cash to feed their children or to escape abuse?”.

The crux of the issue, as Jha describes it, is that many Indian women save their money purely in cash, often in secret, and have limited or no access to the formal banking sector. Women commonly maintain these savings in order to purchase medicine for their children or food for the family when regular income is scarce. Others maintain separate savings as a safety net when faced with abuse in the household. Keeping these cash savings secret from their husbands allows women to maintain control over how the money is spent.

Demonetization presents these women with a dilemma—either lose most or all of your cash savings, or risk revealing them in an attempt to deposit them into a bank account. With as many as 80% of Indian women outside the formal banking sector, those with hidden cash savings are attempting to recoup some of their losses by selling their defunct notes for new notes, at a huge loss (Selim et al. 2005). However as Jha notes, even setting up women with a bank account is not without hurdles. Just opening an account risks revealing the existence of the secret savings. Even getting to the bank to make a deposit is especially challenging for women in poor, rural areas, because they are discouraged from leaving the home after dark.

Household Bargaining Framework

Jha’s reporting on the effects of demonetization takes the framework of the household bargaining model as given and as the proper lens through which to understand the decision problem these women face at home. The situation she describes is one where husbands and wives have different spending priorities, and women are keeping cash secretly in order to fund their priority expenditures. Beyond the anecdotes Jha offers that support the bargaining model, there is a body of academic literature that suggests this model is a useful lens through which to understand household dynamics. These include Dulfo 2003, which found that South African pensions sent to grandmothers increased child nutrition (measured as weight-for-height) whereas those sent to grandfathers did not. Under the standard neoclassical model of the household, who received the pension should not make a difference, only the size of the transfer.

If we choose to accept the evidence in favor of the household bargaining model and accept it as a good approximation of household behavior, we can then consider what the model predicts will be the effects of India’s demonetization policy. In the bargaining model, each spouse has their own set of preferences for allocating the household’s resources. For example, the wife may want to purchase food for a child, while the father may want to use that money for alcohol. Each spouse also has a threat point—a level of utility below which the spouse will leave the household or marriage. Continuing the example, if the husband spends too much money on alcohol the wife may opt to take the children and leave the household. As shown in the graph below, the position of the threat points determines which resource allocations are possible, and the maximum level of utility each spouse could attain if they had all the bargaining power, while still keeping the household intact. Bargaining between spouses determines which allocation is ultimately chosen, and this Nash equilibrium is shown in the figure as U*1—which is somewhere between the husband and wife’s preferred points, conditional on not triggering the other’s threat point.

Demonetization plays a role in this model by removing or vastly reducing the wife’s secret cash savings. Following the terminology presented in McElroy 1990, this shock to the wife’s savings can be thought of as one type of extrahousehold environmental changes (EEP). The savings allow the wife to have some money to fall back on should her husband attempt to enforce an allocation that breaches her threat point. The cash acts as an upward shifter for the wife’s threat point, which is at Tw1 prior to demonetization. The corresponding Nash equilibrium for the household is U*1. Even with full bargaining power, the best the husband could do without violating the wife’s threat point is Uh(max)1.

However, the rollout of demonetization destroyed or greatly reduced this fallback option for the wife, due to the challenges women face changing or depositing defunct notes that Jha highlighted. This pushes the wife’s threat point from Tw1 to Tw2, and moves the Nash equilibrium to U*2. Notice that compared to the original equilibrium, the wife’s utility has decreased while the husband’s has increased. This can also be seen in the movement of the husband’s maximum attainable utility rightward to Uh(max)2. Notice too that the graph assumes that the wife’s secret savings were not included in the households shared assets and thus the decrease in these savings does not shift the household’s utility frontier inward.


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