Working Paper

Marriage and consumption insurance: what's love got to do with it?

Abstract: 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.

https://doi.org/10.26509/frbc-wp-200104

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2001

Number: 0104