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The Effect of Marital Status and Children on Savings and Portfolio Choice

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Author Info
David Love (Williams College)

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Abstract

This paper investigates the impact of demographic shocks on optimal decisions about saving, life insurance, and, most centrally, asset allocation. We analyze these choices within the framework of a life-cycle model that features exogenous changes in family composition, heterogeneity in lifetime income, and uninsurable uctuations in earnings and medical costs. Our analysis indicates that marital-status transitions and children can have important effects on optimal household decisions. Widowhood induces sharp reductions in the portfolio shares in stock, and the impact is largest for women and individuals with children. Divorce causes men and women to reallocate their portfolios in different directions; men choose much riskier allocations, while women opt for safer ones. Children play a fundamental role in the optimal portfolio decisions. Men with children, for example, increase their shares in response to divorce by less than half as much as men without children. Comparing our simulation results with panel-data evidence on stockholding from the PSID and the HRS, we conclude that changes in marital status and children matter empirically as well, but not always in the ways that the model predicts.

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Publisher Info
Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2008-13.

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Length: 57 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:wil:wileco:2008-13

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Related research
Keywords: Portfolio choice; mortality risk; marital status; precautionary saving; be- quests; risk and uncertainty.;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
I10 - Health, Education, and Welfare - - Health - - - General
J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure

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