Limited Marital Commitment and Household Portfolios
31 Pages Posted: 18 Nov 2016
Date Written: November 17, 2016
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
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