Volume 6 - Article 13 | Pages 355-382
To Tie the Knot or Not: Cohabitation, Marriage and Individuals' Attitudes to Risk
|Date received:||20 Dec 2001|
|Date published:||23 May 2002|
|Keywords:||class partition, imperfect information, risk, stochastic dominance|
This paper introduces imperfect information, learning, and risk aversion in a two sided matching model. The model provides a theoretical framework for the commonly occurring phenomenon of cohabitation followed by marriage, and is consistent with empirical findings on these institutions.
The paper has three major results. First, individuals set higher standards for marriage than for cohabitation. When the true worth of a cohabiting partner is revealed, some cohabiting unions are converted into marriage while others are not. Second, individuals cohabit within classes. Third, the premium that compensates individuals for the higher risk involved in marriage over a cohabiting partnership is derived. This premium can be decomposed into two parts. The first part is a function of the individual's level of risk aversion, while the second part is a function of the difference in risk between marriage and cohabitation.