Marriage and Consumption

How do marriage prospects affect the consumption paths of individuals? In all the theoretical and empirical work in economics on the role of the life-cycle in motivating savings and consumption smoothing decisions, there is surprising little addressing this fundamental question. There are many reasons why people choose to live together (and some choose subsequently to split up). Love, companionship and raising children are prominent non-economic examples. There are also, however, economic benefits to living together rather than living apart. Examples of these benefits are the sharing of household public goods, division of labour, and risk-pooling. Dating at least from Gary Becker's well-known work on the "marriage market" (1973, 1974) a large theoretical and empirical literature has developed in which individuals' decisions about marriage, childbearing, and divorce are placed within the paradigm of rational choice analysis predicated on the assumption that marriage generates additional gains.

But if single people anticipate the gains from marriage, then this will surely affect their savings decisions within a life-cycle model, as will the anticipation of divorce for a married couple. This issue, though, has hardly been addressed in the literature; in taking the life-cycle model to consumption and savings data, some account is often taken of cohabitation and children in the sense of scaling some form of household welfare function to account for household size and composition, but still important elements of the life-cycle are missing. In particular, most life-cycle models of consumption do not take explicit account of the possibility of people leaving the parental home, living alone, forming a cohabiting relationship, marrying, having children, divorcing, re-marrying, surviving a partner, and so on, and the strategic implications that this might have for someone planning their future savings decisions. To our knowledge, there has been very little research that asks the following type of question: what effect do the potential gains from marriage (or loss of gains on divorce) and the process by which decisions are made within the household have on consumption and saving decisions across the entire life-cycle, particularly in comparison to the traditional life-cycle model? This will be the focus of this research.

We will develop a 'life-stages' model with forward looking individuals who allow for economies of scale in consumption if they ever become part of a couple and ask how well this model can rationalise what we see in UK expenditure data. As this is a novel area of research we will focus on one life-stage transition (single to couple) in this initial work. The techniques we develop will ultimately be applicable to other transitions, and eventually to a complete model of the life-cycle - a much more ambitious undertaking.

Although no one disputes that there are material gains from marriage, there is no consensus on how large these gains are, and whether they are relatively larger for, say wealthy people than for poor people - this, of course, is because we never observe individual consumptions in data on many-person households. Traditional estimates of consumption economies tend to impose some arbitrary identifying assumption such as saying that different households with the same budget share spent on food are equally well off. We aim to provide estimates of these economies of scale (among other things) by estimating our simulated model on the data. Such estimates are useful for a number of issues, including: setting pensions (or other government transfers) for couples relative to singles; as inputs to marriage and matching models; to scale cross-country GDP comparisons (for example, around 36% of UK households are single-person whereas in Spain this figure is only around 15% - this distorts comparisons of material welfare based on per capita measures); payment for wrongful death to a surviving spouse.

Although this is an academic piece of research, its output will be of interest to those outside the academic arena. One output of the work will be an estimate of the economies of scale in consumption of singles relative to couples; that is an answer to the question 'how much more does a couple have to spend to be as well off as single person spending a certain amount?'.

Although no one disputes that there are material gains from marriage, there is no consensus on how large these gains are, and whether they are relatively larger for, say wealthy people than for poor people - this, of course, is because we never observe individual consumptions in data on many-person households. However some estimate of the gains is used (or should be used) widely outside academia, particularly in public policy, but also in other areas. Examples include: setting pensions (or other government transfers) for couples relative to singles; to scale cross-country GDP comparisons (for example, around 36% of UK households are single-person whereas in Spain this figure is only around 15% - this distorts comparisons of material welfare based on per capita measures) and similarly to construct properly scaled within-country per-capita GDP measures over time or inequality measures encompassing different household compositions, and; payment for wrongful death to a surviving spouse.

Traditional estimates of economies of scale tend to rely on some ad-hoc identifying assumption (a well known example is to assume that different families who spend the same proportion of their budget on food are equally well off - known as Engel Scales) and/or be focused on the addition of children to a household. But, as described above, for many policy purposes it is relevant to know the economies of scale going from a one adult household to a two adult household. The estimates we provide should, therefore, be of interest to a non-academic audience, and they are also more theoretically grounded than some other methods.