For Better or Worse: Financial Decision-Making Behavior of Married Couples?

Abstract

This study constructs a theoretical model of household bargaining to explain the financial decision-making behavior of married couples. We empirically test our model using data from the 2000 Health and Retirement Study (HRS). The HRS is unique among national data sets in that it identifies the primary decision-maker and the more financially knowledgeable spouse. It also includes detailed information on the individual retirement accounts (IRAs) of both the husband and the wife. Using this information, we estimate a series of regression models to investigate how decision making and bargaining power affect whether a couple owns an IRA, how much they invest in it, and whether they allocate it to mostly stocks. In general, the results show that, when the husband has more decision-making power than the wife or the decision-making power is about equal, the couple is more likely to own an IRA and to have a larger amount invested in an IRA. Furthermore, the account is more likely to be allocated to mostly stocks when the husband is the financially knowledgeable spouse. Traditional measures of bargaining power also were significant in all of our models, even after we controlled for decision making. The findings have important implications for educators and financial practitioners and provide insight into the importance of having both the husband and wife actively involved in making financial decisions.

Family Decision Making and Resource Protection Adequacy

“…Bargaining frameworks based on the seminal works of Nash (1950) and Rubinstein (1982) have been applied in studies of the distribution of gains from marriage (Manser and Brown 1980; McElroy and Horney 1981), spending on clothing, food, alcohol or tobacco (Lundberg, Pollak, and Wales 1997; Lundberg and Pollak 2003; Phipps and Burton 1998; Ward‐Batts 2008), fertility and labor supply decisions (Schultz 1990), health outcomes (Thomas 1990) and time spent by spouses on leisure and chores (Friedberg and Webb, unpublished manuscript). Bargaining models also offer noteworthy explanations of household financial decisions, including charitable giving (Andreoni et al 2003), saving for retirement (Lyons et al 2007, Yilmazer and Lyons 2010) and investing and asset allocation (Friedberg and Webb 2006; Hotchkiss 2005; Lyons, Neelakantan, and Scherpf 2008).…”

“…Second, there can be disagreement in terms of the distribution of the decision‐making power. Previous studies have used these questions to test unitary vs. bargaining models of household decisions (Elder and Rudolph, 2003) and to analyze the role of the distribution of bargaining power in household decisions regarding asset allocations and investment behavior (Friedberg and Webb 2006; Lyons et al 2007).…”

“…However, several studies of the decision‐making process within married households have recognized the need to examine household financial decisions from the standpoint of a bargaining framework, rather than unitary utility‐maximizing models (Elder and Rudolph 2003; Manser and Brown 1980; McElroy and Horney 1981). Researchers use models that recognize within‐household dynamics to analyze a variety of financial behaviors, including investment decisions, retirement planning and charitable giving (e.g., Browning 2000; Andreoni, Brown, and Rischall 2003; Lundberg, Startz, and Stillman 2003; Lyons et al 2007; Yilmazer and Lyons 2010). Aura (2005) provides compelling evidence that the bargaining model can explain life insurance holdings better than the single utility‐maximizing model.…”

Gender and Marital Differences in Wealth and Investment Decisions: Implications for Researchers, Financial Professionals, and Educators

“…A number of recent studies have used the HRS data to examine both the sources and consequences of decision-making power (e.g., Elder & Rudolph, 2003;Friedberg & Webb, 2006;Lyons, Neelakantan, Fava, & Scherpf, 2007). Elder and Rudolph (2003) employed the "final say" question in the HRS to identify the sources of decision-making power within households.…”

Time Resource Transfers of Married Couples to Their Parents on Decision-Making Power

“…Husbands and wives might try to allocate their resources toward preferred parents, in most cases their own parents. Thus, in the bargaining model, the decisions of adult children's resource transfers to parents are considered as the result of a bargaining process between husband and wife with heterogeneous preferences (Lyons, Neelakantan, Fava, & Scherpf, 2007).…”