Advertisement

Journal of Population Economics

, Volume 32, Issue 3, pp 845–876 | Cite as

Endogenous divorce risk and investment

  • Andrew GrantEmail author
  • Steve Satchell
Original Paper
  • 210 Downloads

Abstract

This paper addresses issues of divorce, consumption and investment. Divorce, in our model, is a forward put option on a non-traded variable, marital quality. We endogenise divorce so that the future decision that the couple makes will depend, inter alia, on current consumption, current wealth, investment outcomes and marital quality. We suggest a number of specifications for the bivariate utility of wealth and marital quality. We find that the mixex framework of Tsetlin and Winkler (Manag Sci 55:1942–1952, 2009) offers a useful combination of flexibility and tractability for our problem. Calibrations illustrating the usefulness of the model are provided.

Keywords

Divorce Consumption-investment Two-period model 

JEL Classification

G12 G23 G24 

Notes

Acknowledgements

The authors would like to thank the anonymous referees for helpful comments and suggestions.

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflict of interest.

References

  1. Abbas AE (2011) Decomposing the cross derivatives of a multiattribute utility function into risk attitude and value. Decis Anal 8:103–116Google Scholar
  2. Addoum JM, Kung H, Morales G (2016) Limited marital commitment and household portfolios. mimem, Cornell University, NYGoogle Scholar
  3. Adelmann PK, Chadwick K, Baerger DR (1996) Marital quality of black and white adults over the life course. J Soc Pers Relat 13:361–384Google Scholar
  4. Amato PR (2010) Research on divorce: continuing trends and new developments. J Marriage Fam 72:650–666Google Scholar
  5. Amato PR, Beattie B (2011) Does the unemployment rate affect the divorce rate? An analysis of state data 1960-2005. Soc Sci Res 40:705–715Google Scholar
  6. Arrondel L, Calvo Pardo H, Oliver X (2010) Temperance in stock market participation: evidence from france. Economica 77:314–333Google Scholar
  7. Attema AE, Brouwer WBF (2012) A test of independence of discounting from quality of life. J Health Econ 31:22–34Google Scholar
  8. Badarinza C, Campbell JY, Ramadorai T (2015) International comparative household finance, mimeo, University of Oxford and Harvard UniversityGoogle Scholar
  9. Becker GS (1974) A theory of marriage: part II. J Polit Econ 82:S11–S26Google Scholar
  10. Becker GS, Landes EM, Michael RT (1977) An economic analysis of marital instability. J Polit Econ 85:1141–1187Google Scholar
  11. Bertocchi G, Brunetti M, Torricelli C (2011) Marriage and other risky assets: a portfolio approach. J Bank Financ 35:2902–2915Google Scholar
  12. Bleichrodt H, Doctor JN, Filko M, Wakker PP (2011) Utility independence of multiattribute utility theory is equivalent to standard sequence invariance of conjoint measurement. J Math Psychol 55:451–456Google Scholar
  13. Boertien D (2012) Jackpot? Gender differences in the effects of lottery wins on separation. J Marriage Fam 74:1038–1053Google Scholar
  14. Bommier A, Le Grand F (2010) Too risk averse to purchase insurance? A theoretical glance at the annuity puzzle. Health Econ 33:1079–1088Google Scholar
  15. Bougheas S, Georgellis Y (1999) The effect of divorce costs on marriage formation and dissolution. J Popul Econ 12:489–498Google Scholar
  16. Brennan MJ, Xia Y (2002) Dynamic asset allocation under inflation. J Financ 57:1201–1238Google Scholar
  17. Browning M, Chiappori PA (1998) Efficient intra-household allocations: a general characterization and empirical tests. Econometrica 66:1241–1278Google Scholar
  18. Brunnermeier MK, Nagel S (2008) Do wealth fluctuations generate time-varying risk aversion? Micro-evidence on individuals’ asset allocation. Am Econ Rev 98:713–796Google Scholar
  19. Burgess S, Propper C, Aassve A (2003) The role of income in marriage and divorce transitions among young americans. J Popul Econ 16:455–475Google Scholar
  20. Call VRA, Heaton TB (1997) Religious influence on marital stability. J Sci Study Relig 36:382–392Google Scholar
  21. Campbell JY, Viceira LM (2002) Strategic asset allocation. Oxford University Press, New YorkGoogle Scholar
  22. Campbell JY (2006) Household finance. J Financ 53:1553–1604Google Scholar
  23. Carmona R, Danolova A (2004) Hedging financial instruments written on non-tradable assets, mimeo, Princeton UniversityGoogle Scholar
  24. Chetty R, Sándor L., Szeidl A (2017) The effect of housing on portfolio choice. J Financ 72:1171–1212Google Scholar
  25. Chowdhury A (2013) Til recession do us part: booms, busts and divorce in the United States. Appl Econ Lett 20:255–261Google Scholar
  26. Christiansen C, Joensen JS, Rangvid J (2015) Understanding the effects of marriage and divorce on financial investments: the role of background risk sharing. Econ Inq 53:431–447Google Scholar
  27. Cigno A (2012) Marriage as a commitment device. Rev Econ Househ 10:193–213Google Scholar
  28. Cigno A (2014) Is marriage as good as a contract? CESifo Econ Stud 60:599–612Google Scholar
  29. Cocco JF (2005a) Portfolio choice in the presence of housing. Rev Financ Stud 18:535–567Google Scholar
  30. Cocco JF, Gomes FJ, Maenhout PJ (2005b) Consumption and portfolio choice over the life cycle. Rev Financ Stud 18:491–533Google Scholar
  31. Cocco JF, Gomes FJ (2012) Longevity risk, retirement savings, and financial innovation. J Financ Econ 103:507–529Google Scholar
  32. Cremer H, Pestieau P, Roeder K (2015) United but (un)equal: human capital, probability of divorce, and the marriage contract. J Popul Econ 28:195–217Google Scholar
  33. Cubeddu L, Ríos-Rull J-V (2003) Families as shocks. J Eur Econ Assoc 1:671–682Google Scholar
  34. Denuit M, Eeckhoudt L, Rey B (2010) Some consequences of correlation aversion in decision science. Ann Oper Res 176:259–269Google Scholar
  35. Denuit M, Eeckhoudt L, Tsetlin I, Winkler RL (2013) Risk measures and attitudes. Springer, London, Ch. Multivariate Concave and Convex Stochastic Dominance, pp 11–32Google Scholar
  36. Detemple J, Sundaresan S (1999) Nontraded asset valuation with portfolio constraints: a binomial approach. Rev Financ Stud 12:835–872Google Scholar
  37. Durtschi JA, Fincham FD, Cui M, Lorenz FO, Conger RD (2011) Dyadic processes in early marriage: attributions, behavior, and marital quality. Fam Relat 60:421–434Google Scholar
  38. Dzoghleva H, Lamberton CP (2014) Should birds of a feather flock together? understanding self-control decisions in dyads. J Consum Res 41:361–379Google Scholar
  39. Edwards RD (2010) Optimal portfolio choice when utility depends on health. Int J of Econ Theory 6:205–225Google Scholar
  40. Eeckhoudt L, Rey B, Schlesinger H (2007) A good sign for multivariate risk taking. Manag Sci 53:117–124Google Scholar
  41. Eeckhoudt L, Schlesinger H (2006) Putting risk in its proper place. Am Econ Rev 96:280–289Google Scholar
  42. Eeckhoudt L, Schlesinger H (2013) Handbook of insurance, 2nd edn. Springer, New York, Ch. Higher-Order Risk Attitudes, pp 41–57Google Scholar
  43. Epstein LG, Tanny SM (1980) Increasing generalized correlation: a definition and some economic consequences. Can J Econ 13:16–34Google Scholar
  44. Fan CS (2001) A model of endogenous divorce and fertility. J Popul Econ 14:101–117Google Scholar
  45. Fernández R, Wong JC (2014) Divorce risk, wages and working wives: a quantitative life-cycle analysis of female labour force participation. Econ J 124:319–358Google Scholar
  46. Finkelstein A, Luttmer EFP, Notowidigdo MJ (2013) What good is wealth without health? The effect of health on the marginal utility of consumption. J Eur Econ Assoc 11:221–258Google Scholar
  47. Fisher H, Low H (2009) Sharing lives, dividing assets: an inter-disciplinary study. Hart, Portland, Ch. Who Wins, Who Loses and Who Recovers From Divorce?, pp 227–256Google Scholar
  48. Gollier C (2001) The economics of risk and time. MIT Press, CambridgeGoogle Scholar
  49. Gomes F, Michaelides A (2005) Optimal life-cycle asset allocation: understanding the empirical evidence. J Financ 60:869–904Google Scholar
  50. Gomes F, Michaelides A (2008) Asset pricing with limited risk sharing and heterogeneous agents. Rev Financ Stud 21:415–448Google Scholar
  51. González L, Viitanen TK (2009) The effect of divorce laws on divorce rates in Europe. Eur Econ Rev 53:127–138Google Scholar
  52. González L, Özcan B (2012) The risk of divorce and household saving behavior. J Hum Resour 48:404–434Google Scholar
  53. Gorchoff SM, John OP, Helson R (2008) Contextualizing change in marital satisfaction during middle age. Psychol Sci 19:1194–1200Google Scholar
  54. Greenwood J, Guner N, Kocharkov G, Santos C (2016) Technology and the changing family: a unified model of marriage, divorce, educational attainment, and married female labor-force participation. Am Econ J Macroecon 8:1–41Google Scholar
  55. Gregory R, Lichtenstein S, Slovic P (1993) Valuing environmental resources: a constructive approach. J Risk Uncertain 7:177–197Google Scholar
  56. Guerrero AM, Herrero C (2005) A semi-separable utility function for health profiles. J Health Econ 24:33–54Google Scholar
  57. Haliassos M, Bertaut CC (1995) Why do so few hold stocks? Econ J 105:1110–1129Google Scholar
  58. Heaton J, Lucas D (1997) Market frictions, savings behavior, and portfolio choice. Macroecon Dyn 1:76–101Google Scholar
  59. Heaton J, Lucas D (2000) Portfolio choice in the presence of background risk. Econ J 110:1–26Google Scholar
  60. Hellerstein JK, Morrill MS (2011) Booms, busts, and divorce. J Econ Anal Policy 11(1):1–26Google Scholar
  61. Henderson V (2002) Valuation of claim on nontraded assets using utility maximization. Math Financ 12:351–373Google Scholar
  62. Jacobs H, Müller S, Weber M (2014) How should individual investors diversify? An empirical evaluation of alternative asset allocation policies. J Financ Mark 19:62–85Google Scholar
  63. James SL (2015) Variation in trajectories of women’s marital quality. Soc Sci Res 49:16–30Google Scholar
  64. Kabátek J, Ribar DC (2018) Not your lucky day: romantically and numerically special wedding date Divorce Risks. J Popul Econ 54:xx–xxGoogle Scholar
  65. Keeney RL, Raiffa H (1976) Decisions with multiple objectives: preferences and value tradeoffs. Wiley, New YorkGoogle Scholar
  66. Keyfitz N, Caswell H (2005) Applied mathematical demography, 3rd edn. Springer, New YorkGoogle Scholar
  67. Klein J (2017) House price shocks and individual divorce risk in the united states. J Fam Econ Iss 38:628–649Google Scholar
  68. Kreider RM, Ellis R (2011) Number, timing, and duration of marriages and divorces: 2009. Current Population Reports 70-125, U.S. Census BureauGoogle Scholar
  69. Lavner JA, Bradbury TN (2010) Patterns of change in marital satisfaction over the newlywed years. J Marriage Fam 72:1171–1187Google Scholar
  70. Lavner JA, Bradbury TN, Karney BR (2012) Incremental change or initial differences? Testing two models of Marital Deterioration. J Fam Psychol 26:606–616Google Scholar
  71. Lehrer EL, Chiswick CU (1993) Religion as a determinant of marital stability. Demography 30:385–404Google Scholar
  72. Love DA (2010) The effect of marital status and children on savings and portfolio choice. Rev Financ Stud 23:385–432Google Scholar
  73. Mazzocco M, Ruiz C, Yamaguchi S (2013) Labor supply, wealth dynamics, and marriage decisions, mimeo, UCLAGoogle Scholar
  74. Peters HE (1986) Marriage and divorce: informational constraints and private contracting. Am Econ Rev 76:437–454Google Scholar
  75. Pratt JW (1988) Aversion to one risk in the presence of others. J Risk Uncertain 1:395–413Google Scholar
  76. Preston SH (1975) Estimating the proportion of american marriages that end in divorce. Sociol Methods Res 3:435–460Google Scholar
  77. Quiggin J (2003) Background risk in generalized expected utility theory. Econ Theory 22:607–611Google Scholar
  78. Rainer H, Smith I (2010) Staying together for the sake of the home? House price shocks and partnership dissolution in the UK. J R Stat Soc Ser A 173:557–574Google Scholar
  79. Renneboog L, Spaenjers C (2012) Religion, economic attitudes, and household finance. Oxf Econ Pap 64:103–127Google Scholar
  80. Richard SF (1975) Multivariate risk aversion, utility independence and separable utility functions. Manag Sci 22:12–21Google Scholar
  81. Richards TJ, Manfredo MR, Sanders DR (2004) Pricing weather derivatives. Am J Agric Econ 86:1005–1017Google Scholar
  82. Schaller J (2013) For richer, if not for poorer? marriage and divorce over the business cycle. J Popul Econ 26:1007–1033Google Scholar
  83. Scherer B (2014) Quantitative approaches to high net worth investment. Risk Books, London, Ch. Asset Allocation and Divorce Risk pp 253–263Google Scholar
  84. Stango V, Zinman J (2009) Expoential growth bias and household finance. J Financ 64:2807–2849Google Scholar
  85. Stevenson B (2007) The impact of divorce laws on marriage-specific capital. J Labor Econ 25:75–94Google Scholar
  86. Svensson LEO, Werner IM (1993) Nontraded assets in incomplete markets: pricing and portfolio choice. Eur Econ Rev 37:1149–1168Google Scholar
  87. Torrance GW, Boyle MH, Horwood SP (1982) Application of multi-attribute utility theory to measure social preferences for health states. Oper Res 30:1043–1069Google Scholar
  88. Tsetlin I, Winkler RL (2005) Risky choices and correlated background risk. Manag Sci 51:1336–1345Google Scholar
  89. Tsetlin I, Winkler RL (2009) Multiattribute utility satisfying a preference for combining good with bad. Manag Sci 55:1942–1952Google Scholar
  90. VanLaningham J, Johnson DR, Amato P (2001) Marital happiness, marital duration, and the U-shaped curve: evidence from a five-wave panel study. Soc Forces 78:1313–1341Google Scholar
  91. Viceira LM (2001) Optimal portfolio choice for long-horizon investors with nontradable labor income. J Financ 56:433–470Google Scholar
  92. Voena A (2015) Yours, mine and ours: do divorce laws affect the intertemporal behavior of married couples? Am Econ Rev 105:2295–2332Google Scholar
  93. Vohs KD, Finkenauer C, Baumeister RF (2011) The sum of friends’ and lovers’ self-control scores predicts relationship quality. Soc Psychol Personal Sci 2:138–145Google Scholar
  94. Wachter JA, Yogo M (2010) Why do household portfolio shares rise in wealth? Rev Financ Stud 23:3929–3965Google Scholar
  95. Wallenius J, Dyer JS, Fishburn PC, Steuer RE, Zionts S, Deb K (2008) Multiple criteria decision making, multiattribute utility theory: recent accomplishments and what lies ahead. Manag Sci 54:1336–1349Google Scholar
  96. Wiik KA, Bernhardt E, Noack T (2009) A study of commitment and relationship quality in Sweden and norway. J Marriage Fam 71:465–477Google Scholar
  97. Williams DT, Cheadle JE, Goosby BJ (2015) Hard times and heart break: linking economic hardship and relationship distress. J Fam Issues 36:924–950Google Scholar
  98. Wolfers J (2006) Did unilateral divorce laws raise divorce rates? A reconciliation and new results. Am Econ Rev 96:1802–1820Google Scholar
  99. Yao R, Zhang HH (2005) Optimal consumption and portfolio choices with risky housing and borrowing constraints. Rev Financ Stud 18:197–239Google Scholar
  100. Yogo M (2014) Portfolio choice in retirement: health risk and the demand for annuities, housing, and risky assets, mimeo, Federal Reserve Bank of MinneapolisGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.University of SydneyDarlingtonAustralia
  2. 2.Department of Economics, Trinity CollegeUniversity of CambridgeCambridgeUK

Personalised recommendations