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Limited Marital Commitment and Household Portfolios

31 Pages Posted: 18 Nov 2016  

Jawad M. Addoum

Cornell University

Howard Kung

London Business School

Gonzalo Morales

University of Alberta

Date Written: November 17, 2016

Abstract

This paper examines the link between marital decisions, consumption, and optimal portfolio choice in a life-cycle model with limited marital commitment. Without full commitment, individual income shocks lead to renegotiation between spouses, altering relative bargaining power and endogenously generating time-varying risk aversion at the household-level. Consequently, changes in relative income are associated with significant shifts in household portfolios. We find strong support for this prediction using data from the PSID. The model can also rationalize the link between marital transitions and portfolio allocations observed in the data. Finally, the risk-sharing benefits of marriage imply a positive link between wealth and risky asset holdings across households.

Keywords: Optimal Portfolio Choice, Limited Commitment, Bargaining Power, Risk Aversion

JEL Classification: G10, G11, G12, D14, D91

Suggested Citation

Addoum, Jawad M. and Kung, Howard and Morales, Gonzalo, Limited Marital Commitment and Household Portfolios (November 17, 2016). Available at SSRN: https://ssrn.com/abstract=2871296

Jawad Addoum (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Howard Kung

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Gonzalo Morales

University of Alberta ( email )

Edmonton, AB T6G 2R3
Canada

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