This paper explores the role of marriage when markets are incomplete so that individuals cannot diversify their idiosyncratic labor income risk. Ceteris paribus, an individual would prefer to marry a "hedge" (i.e. a spouse whose income is negatively correlated with her own) as it raises her expected utility. However, the existence of love complicates the picture: while marrying a hedge is important, an individual may not do so if she finds someone with whom she shares a great deal of love. Is love more important to a lasting marriage than economic compatibility? To answer this question, I develop a simple model where rational individuals meet, enjoy the economic and non-pecuniary benefits of marriage (i.e. love), and then must decide whether to remain married or divorce. The model predicts that if love is persistent and the resolution of uncertainty to agents' income is early, then those who in fact married hedges (and for good reason) are the ones most likely to be caught short with too little love in order to save a marriage in the event of an adverse shock. Consequently, under these conditions individuals who are good hedges for one another are more likely to marry one another, although once married, they will be more likely to divorce. In contast, if love is temporary (in the sense of reverting to a common mean) and the resolution of uncertainty to agents' income is predominantly later, then those who in fact marry hedges will in fact be less likely to subsequently divorce. Evidence is provided to distinguish which of these alternative scenarios is in support of these aspects of the decision to stay married. Additional hypotheses regarding the effect of differences in the expected means and volatilities of partners' incomes are also derived from the theory and tested.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 507.
Find related papers by JEL classification: D10 - Microeconomics - - Household Behavior - - - General J10 - Labor and Demographic Economics - - Demographic Economics - - - General J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991.
"International real business cycles,"
Staff Report
146, Federal Reserve Bank of Minneapolis.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Martin Halla & Johann Scharler, 2008.
"Marriage, Divorce and Interstate Risk Sharing,"
NRN working papers
2008-03, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
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Laura Blow & Martin Browning & Mette Ejrnæs, 2009.
"Marriage and Consumption,"
CAM Working Papers
2009-07, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
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