Marriage and consumption insurance: what's love got to do with it?
This paper explores marriage’s role when markets are incomplete and individuals cannot diversify their idiosyncratic labor income risk. All else being equal, an individual would rather marry a “hedge” (a person whose income is negatively correlated with her own) because doing so raises her expected utility. However, the existence of love complicates the picture: Although 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, the author develops a simple model in which rational individuals meet, enjoy marriage’s economic and nonpecuniary benefits (i.e., love), and then must decide whether to remain married or divorce.
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