The Role of Incentives in Household Economic Decision-Making

Abstract

This study examines the role of economic incentives in shaping household economic decision-making, focusing on consumption, savings, and labor force participation. Using household-level data and econometric approaches including OLS, Fixed Effects, and Two-Stage Least Squares (2SLS), the analysis evaluates how subsidies, social assistance, tax incentives, and price changes influence allocation decisions. The results indicate that subsidies and direct transfers significantly increase household consumption, particularly among low-income groups, while tax incentives have a stronger effect on savings accumulation. The impact of incentives on labor force participation is relatively limited, suggesting that labor supply decisions are more strongly influenced by structural and demographic factors. Elasticity analysis reveals heterogeneous responses across income groups, with low-income households exhibiting higher consumption responsiveness and high-income households showing stronger savings adjustments. The findings are broadly consistent with rational choice theory through the presence of income and substitution effects, while also highlighting behavioral elements such as limited intertemporal optimization among vulnerable households. Overall, the study emphasizes the importance of well-targeted and differentiated incentive policies to achieve both short-term welfare stabilization and long-term economic resilience.