"Marriage and Consumption Insurance: What's Love Got to Do With
It?"
BY: GREGORY D. HESS
Oberlin College
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
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Paper ID: CESifo Working Paper Series No. 507
Date: June 2001
Contact: GREGORY D. HESS
Email: Mailto:gregory.hess at oberlin.edu
Postal: Oberlin College
Oberlin, OH 44074 USA
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ABSTRACT:
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 contrast, 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.
Keywords: Consumption Insurance, Marriage