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Does the balance of power within a family matter? The case of the Retirement Equity Act

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  • Saku Aura

Abstract

This paper studies within-family decision making regarding investment in income protection for surviving spouses using a simple and tractable Nash-bargaining model. A change in US pension law (the Retirement Equity Act of 1984) is used as an instrument to derive predictions from the bargaining model and to contrast these with the predictions of the classical single-utility-function model of the household. This law change gave spouses of married pension-plan participants the right to survivor benefits unless they explicitly waived this right. The classical view of household behavior predicts that this would have had no effect on choices, while the bargaining model predicts an increase in spousal survivor protection. In the empirical part of the paper, the predictions of the classical model regarding the amount of life-insurance protection and the likelihood of a pensioner selecting survivor benefits are rejected in favor of the predictions of the Nash-bargaining model. The paper thus provides evidence for the need to take the existence of multiple decision makers into account when studying household behavior.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 202.

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Handle: RePEc:igi:igierp:202

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  1. Laurence J. Kotlikoff, 1987. "Intergenerational Transfers and Savings," NBER Working Papers 2237, National Bureau of Economic Research, Inc.
  2. Esther Duflo, 2000. "Grandmothers and Granddaughters: Old Age Pension and Intra-household Allocation in South Africa," NBER Working Papers 8061, National Bureau of Economic Research, Inc.
  3. Jeffrey Brown, 2001. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Chapters, National Bureau of Economic Research, Inc, in: Themes in the Economics of Aging, pages 91-126 National Bureau of Economic Research, Inc.
  4. Lundberg, S.J. & Pollak, R.A. & Wales, T.J., 1994. "Do Husbands and Wives Pool Their Resources? Evidence from U.K. Child Benefit," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 94-6, Department of Economics at the University of Washington.
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  6. Shelly J. Lundberg & Jennifer Ward-Batts, 2000. "Saving for Retirement: Household Bargaining and Household Net Worth," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1414, Econometric Society.
  7. Lundberg, S. & Pollak, R.A., 1991. "Separate Spheres Bargaining and the Marriage Market," Working Papers, University of Washington, Department of Economics 91-08, University of Washington, Department of Economics.
  8. B. Douglas Bernheim & Lorenzo Forni & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1999. "The Adequacy of Life Insurance: Evidence from the Health and Retirement Survey," NBER Working Papers 7372, National Bureau of Economic Research, Inc.
  9. Chiappori, Pierre-Andre, 1988. "Nash-Bargained Households Decisions: A Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 791-96, November.
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  11. McElroy, Marjorie B & Horney, Mary Jean, 1981. "Nash-Bargained Household Decisions: Toward a Generalization of the Theory of Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(2), pages 333-49, June.
  12. Chiappori, Pierre-Andre, 1991. "Nash-Bargained Household Decisions: A Rejoinder," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 761-62, August.
  13. Manser, Marilyn & Brown, Murray, 1980. "Marriage and Household Decision-Making: A Bargaining Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 31-44, February.
  14. K. C. Holden & S. Nicholson, . "Selection of a Joint-and-Survivor Pension," Institute for Research on Poverty Discussion Papers, University of Wisconsin Institute for Research on Poverty 1175-98, University of Wisconsin Institute for Research on Poverty.
  15. M. Browning & P. A. Chiappori, 1998. "Efficient Intra-Household Allocations: A General Characterization and Empirical Tests," Econometrica, Econometric Society, Econometric Society, vol. 66(6), pages 1241-1278, November.
  16. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 56(1), pages 63-90, January.
  17. B. Douglas Bernheim, 1992. "How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," NBER Working Papers 2942, National Bureau of Economic Research, Inc.
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