Archiv Detail

Vortragende Person/Vortragende Personen:
David Koll (University of Mannheim)

Staying together forever? Live-cycle effects of overoptimistic couples

^{(jointly with Ursula Berresheim)}

Abstract: In the US about 40% of all marriages end with a divorce. But many couples are overoptimistic about their marital stability consistent with evidence from the psychology literature. We set up a household life-cycle model with endogenous human capital accumulation and assets with two types of couples: couples with rational and couples with subjective, overoptimistic expectations regarding their exogenous divorce risk. In addition, couples are ex-ante heterogeneous in their joint wages. We quantify the model using data from the United States and show that overoptimism about marital stability leads to higher specialisation within couple which affects on-the-job human capital accumulation of both partners. Especially, the lower-earning spouse accumulates less human capital in an overoptimistic couple compared to a rational one: Overoptimists neglect the risk of divorce and thereby the self-insurance value of human capital connected to divorce. We further find that overoptimistic couples save less, again, because the lower-earning spouse does not anticipate the higher marginal value of savings in case of divorce. First, this effect can explain why in particular divorced women live under poverty after divorce. Second, the model predicts 4-5% higher gender wage and gender earnings gaps in overoptimistic couples. Third, we show that in couples with different initial wages, the initially higher-earning spouse benefits from overoptimism while the lower-earning spouses loses. Finally, we find that if all couples would act under rational expectations, the aggregate levels of total hours worked, human capital and assets in the economy would increase substantially and the gender earnings gap would decrease.

Website