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To Tie the Knot or Not
Cohabitation, Marriage and Individuals' Attitudes to Risk

 

Padma Rao Sahib
Xinhua Gu

 
VOLUME 6 - ARTICLE 13
 
Date Received: 20 Dec 2001
Date Published: 23 May 2002

http://www.demographic-research.org/volumes/vol6/13/

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Abstract
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.

Author's affiliation
Padma Rao Sahib
University of Groningen, Netherlands
Xinhua Gu
University of Toronto, Canada

Keywords
class partition, imperfect information, risk, stochastic dominance

Word count (Main text)
6131

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