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Marriage and Consumption Insurance: What’s Love Got to do With It?

  • Gregory D. Hess

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 507.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_507
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  1. Hess, Gregory D. & Shin, Kwanho, 1998. "Intranational business cycles in the United States," Journal of International Economics, Elsevier, vol. 44(2), pages 289-313, April.
  2. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  3. Hess, Gregory D. & Shin, Kwanho, 2000. "Risk sharing by households within and across regions and industries," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 533-560, June.
  4. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  5. Gregory D. Hess & Kwanho Shin, 1999. "Risk sharing of disaggregate macroeconomic and idiosyncratic shocks," Working Paper 9915, Federal Reserve Bank of Cleveland.
  6. Laurence J. Kotlikoff & Avia Spivak, 1979. "The Family as an Incomplete Annuities Market," UCLA Economics Working Papers 151, UCLA Department of Economics.
  7. Rosenzweig, Mark R & Stark, Oded, 1989. "Consumption Smoothing, Migration, and Marriage: Evidence from Rural India," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 905-26, August.
  8. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  9. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  10. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 370-79, October.
  11. Ogaki, Masao & Zhang, Qiang, 2001. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometrica, Econometric Society, vol. 69(2), pages 515-26, March.
  12. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  14. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
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