skip to content

Keynes Fund

 

Summary of Project Plan


Empirical studies have shown that risk preference plays a significant role in individuals’ financial deci- sions. Surprisingly, much of the household finance literature studies these questions at the individual level, not at the household level, therefore ignoring the rich interactions between spouses.

While this 'unitary' approach simplifies modeling, it struggles to explain a wide range of family behaviors (Benefit (1997); Browning and Chiappori (1998)). In this paper, we would like to open the this “black-box” of household decision-making by studying how financial decisions are made within a household.

The first goal of this paper is to develop a new intra-household bargaining model for financial decision-making. In the model, spouses allocate their wealth between a risky-free asset and a risky asset cooperatively. To model risk preference at the household level, we follow Browning et al. (1994) and assume that household risk preference is a weighted sum of individual risk preferences. Crucially, the weight attached to each individual depends on her relative bargaining power in the household. To the best of our knowledge, this is one of the first attempts to model household portfolio decisions in a bargaining framework.

A serious challenge to estimation is that bargaining power is inherently difficult to observe. We circumvent this difficulty by employing the Household, Income and Labour Dynamics (HILDA) data, which contains detailed responses on individual as well as household characteristics. These rich details allow us to depart from existing literature in two ways. First, we can measure bargaining power directly using self-reported responses on who makes financial decisions for the household. Second, we can study examine a wide range of economic and non-economic characteristics as the potential determinants of household bargaining power, including personality traits, cognitive ability and gender identify norms. As a result, the model accommodates complex interactions between the spouses even when non-economics factors at at play.

In summary, this project relates to the goal of the Keynes Fund in two ways. First, it aims to shed light on why stock market participation is so low. In theory, every individual should invest at least some of her wealth in the stock market, but in practice a large number of households do not participate in the stock market. We argue that household structure may play a role in understanding this puzzle. Second, our model relates non-economic characteristics to bargaining power. This set-up allows us to access the efficiency loss under various scenarios, especially when the decision marker is the less financially sophisticated one.

 

 

Dr. Weilong Zhang

 

Dr Weilong Zhang is a University Lecturer at the Faculty of Economics, University of Cambridge. His current research focuses on the role of personality traits in determining individuals' decisions both in the labour market and within households. He also has broad interests in the evaluation of labour market policies.

 

Share this Project