MARRIAGE AS INSURANCE: How our degree of risk aversion influences whom we marry

New research uses the economics of insurance to help understand who marries whom. The study by Johannes Gierlinger and Sarolta Laczó, published in the August 2018 issue of the Economic Journal, proposes a theory in which more risk-averse women tend to marry more risk-averse men.

The researchers assume that any promise of insurance within a marriage – say, to take care of a partner in the event of future unemployment or health problems – is informal and subject to credibility issues. In other words, spouses only continue to provide insurance to each other as long as they prefer to do so rather than going it alone.

This makes risk-averse individuals particularly attractive partners on the marriage market. They can credibly commit to more generous insurance transfers, since the future benefits from continuing a relationship are more likely to dominate today’s cost of supporting their partner.

Risk aversion is widespread and well documented. People tend to avoid a gamble in which there is an even chance of either getting £11 or losing £10, and to buy insurance even if the premium exceeds the expected loss.

People face a variety of risks, such as unemployment or health problems. Being in a couple can mitigate their effects if spouses provide insurance to each other. But this requires that partners prefer to stay and help out even when the going gets tough.

Think of a man losing his job and his partner paying the mortgage while he is looking for a new opportunity. A few years down the line, she may face a spell of unemployment. By mutually insuring each other, they can keep the house. The stronger the commitment to stay together come what may (or the worse the partners would fare if separated), the better the insurance within the household.

In recent decades, divorce has become widespread, as the process of ending a marriage has become easier, due to legal changes and increased social acceptance. In addition, civil partnerships and simple cohabitation have become popular choices. For unmarried romantic partners, separation is even easier and cheaper – and hence commitment is yet weaker.

The researchers ask whether weaker commitment and the resulting decrease in insurance within households may have changed who matches with whom.

When commitment is very strong, a less risk-averse man is more likely to match with a more risk-averse woman, and vice versa. This is because a partner who is more willing to take a risk can act like an insurer, while someone who dislikes risk a lot appreciates this insurance the most. They are an ideal couple when it comes to mutual insurance.

But as the study shows, when commitment is weaker, people are more likely to sort into couples where spouses’ attitudes toward risk are similar. As long as negative shocks do not hit both partners simultaneously, the unfortunate spouse can still rely on the partner’s help.

In this case, those who dislike risk more become attractive partners, because they really do not want to be single and lose the insurance that their spouse provides. As a result, commitment is stronger and more mutual insurance can be achieved within households where both partners are more risk-averse.

What are the implications of this result? Risk aversion is known to decrease with wealth, since low income is particularly costly for the asset poor. If leaving a spouse is not an option, the insurance motive favours couples in which partners are diverse in their wealth.

Instead, these results imply that as separation becomes easier, inequality within households is likely to decrease due to the insurance motive. Furthermore, as partners become more similar to each another, inequality across households is likely to increase. These predictions are consistent with empirical evidence.

Matching to Share Risk without Commitment’ by Johannes Gierlinger and Sarolta Laczó is published in the August 2018 issue of the Economic Journal.