Abstract
The goal of this paper is to understand the effect of family decision-making on the investment decisions of married men and women. Using data from the Survey of Consumer Finances, we investigate how the spouse’s relative control over financial resources in the household and the life-cycle stage affect the investment choices of married women and men. The results show that married women who have more control over the financial resources are less likely to invest their Defined Contribution Plans (DCPs) in risky assets. Also, women who are married to relatively older men are less likely to take on risk with their DCPs. There is little evidence that the wife’s characteristics affect the investment decisions of married men.
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Notes
One can argue that due to sorting in marriage markets, spouses may have similar risk preferences and be close in age to each other. Unfortunately, we do not directly observe the risk preference of each spouse in the Survey of Consumer Finances, which is the data set used in this study. The data (2001 Survey of Consumer Finances) show that 25% of women have husbands 5 years or more older and 10% of women have husbands 3 years or more younger.
See Chaulk, Johnson and Bulcroft (2003) for the effect of marital status and children on financial risk tolerance, Ulker (2009) for the role of marital history in wealth holdings, Molina and Montuenga (2009) for the effect of motherhood on women’s wage, and Yilmazer (2008) for the role of children in household savings. Malone et al. (2010) examine perceptions of financial well-being among women with and without children who lived in different family forms including marriage, cohabitation, stepfamilies, as well as women who were single and show that women in nontraditional families (single mothers, cohabitors, and stepfamilies) had significantly greater worries about their financial futures than women in first marriages. Additionally, Sanders and Porterfield (2010) investigate the factors associated with asset accumulation of female headed households and show the presence of children reduced the likelihood of having owning assets.
In the non-cooperative framework, each spouse maximizes his or her own utility given the behavior of his/her partner, and there is no pooling of resources and no joint consumption. The game-theoretic outcome in this case is the Nash equilibrium, where the outcome is determined by each spouse’s wages as well as other resources held by each spouse such as non-labor income or education. Alternatively, it is possible for the spouses to reach a cooperative outcome that is the result of an agreement between the two spouses. In the cooperative model, the spouse with less bargaining power is more likely to make concessions during the bargaining process. The utility levels that result from the non-cooperative outcome serve as the default position or “threat point.” Based on this threat point, spouses choose from a set of Pareto-optimal allocations. See Lundberg and Pollak (1996) for a survey of household bargaining models, and Lundberg and Pollak (1994) for a survey of non-cooperative bargaining models.
In the SCF, the respondent of the survey, who may be the husband or the wife, answers the question on the willingness to take financial risks. Our findings do not vary when we exclude this variable from the empirical analysis.
The Health and Retirement Study is the only survey that includes information about the distribution of power within the household. One limitation of the survey, however, is that it includes only households with a member aged between 51 and 61 in 1992.
The questions in the SCF are designed such that a respondent provides information about his or her “spouse or partner.” For the purposes of this study, married households are defined as being legally married or living together with a member of the opposite sex. Less than 8.0% of the sample reported living together with a member of the opposite sex. Excluding these observations from the sample does not significantly alter the results.
Retirement wealth is not included in household assets. Household assets include all other types of financial and nonfinancial assets. Financial assets include the amount invested in checking accounts, savings accounts, CDs, savings bonds, money market accounts, mutual funds, stocks, bonds, call accounts at brokerages, and any other financial assets held by the household. Nonfinancial assets include the value of vehicles, primary residence, other real estate, business assets, and other non-financial assets that are not included elsewhere. Household debt includes the amount of mortgages, lines of credit, credit card balances, installment loans and other types of liabilities. Household net worth is defined as household assets minus household debt.
This finding is consistent with the literature that found evidence of decreasing relative risk aversion (Friend and Blume 1975; Riley and Chow 1992; Siegel and Hoban 1982). The findings in the literature are shown to be sensitive to the way which wealth is defined. We investigate the robustness of our results using only financial assets instead of the sum of financial and nonfinancial assets. The negative correlation between assets and the riskiness of investment decisions regarding assets in DCPs did not disappear.
This finding is consistent with Sung and Hanna (1998) where they found that risk tolerance has an insignificant effect on the wife’s investment decision of retirement funds.
The regression estimates are not presented but are available from the authors upon request.
This result is consistent with Finke and Huston (2003) where they show risk tolerance among those over age 65 is among the strongest predictors of a higher net worth. The risk tolerance seems to affect the investment decisions for all ages.
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Acknowledgements
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) to the Center for Retirement Research at Boston College (CRR). This grant was awarded through the CRR’s Steven H. Sandell Grant Program for Junior Scholars in Retirement Research. The opinions and conclusions are solely those of the authors and should not be construed as representing the opinion or policy of SSA or any agency of the Federal Government or of the CRR. We are grateful to the U.S. Social Security Administration and the Center for Retirement Research at Boston College (CRR) for their generous financial support. This research was awarded the CFP Board’s American Council on Consumer Interests (ACCI) Financial Planning Paper Award. We graciously thank the CFP Board for their recognition and support of this research. We also thank Vickie Bajtelsmit, Alexandra Bernasek, Julianne Cullen, Shoshana A. Grossbard, Nancy Jianakoplos, Kristin Kleinjans, Ann Huff Stevens, and three anonymous referees and the editor, Jing Xiao, the associate editor, Alberto Molina, and seminar participants in the Department of Economics at the University of Illinois Urbana-Champaign and Boğaziçi University, and the ASSA meetings, and public finance participants in the CSWEP Junior Faculty Mentoring Program for providing us valuable feedback.
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Yilmazer, T., Lyons, A.C. Marriage and the Allocation of Assets in Women’s Defined Contribution Plans. J Fam Econ Iss 31, 121–137 (2010). https://doi.org/10.1007/s10834-010-9191-6
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DOI: https://doi.org/10.1007/s10834-010-9191-6