Intrahousehold Insurance and its Implications for Macroeconomic Outcomes

Abstract

Most theoretical and empirical work on consumption, labor supply and saving decisions has been based on the paradigm that households behave as single agents. While this approach is often convenient, it relies on very restrictive assumptions. In recent years, there has been significant progress in developing a more satisfactory theory of decision making within households. The main contribution of this thesis is to explore the significance of intrahousehold risk sharing in the presence of uninsurable, idiosyncratic risk. If individuals are unable to rely on complete asset markets, the extent to which they can cope with uncertainty crucially hinges on the set of risk sharing channels. Despite its vast empirical significance, insurance from the family as one of these channels has mostly been overlooked in the literature. The first chapter investigates the significance of family insurance for savings and labor supply. An economy in which individuals can share risk within households generates aggregate precautionary savings that are substantially smaller than in a similar economy that lacks access to insurance from the family. Intrahousehold risk sharing has its largest impact among wealthpoor households. While the wealth-rich use mainly savings to smooth consumption across unemployment spells, wealth-poor households rely on spousal labor supply. The second chapter documents some stylized facts for the distributions of earnings and wealth across single and married households and presents a theoretical framework that can successfully account for the data. Assortative matching, the effective tax bonus for married couple and directed bequests are found to be key determinants for higher per-capita earnings and net worth among married individuals. The third chapter explores how intrahousehold insurance interacts with the design of unemployment benefit programs. My findings indicate that fiscal policy can take very distinct effects depending on whether intra-household risk sharing is available or not. I also find potential efficiency gains from gender-based taxation.