For richer, for poorer: financial shocks, within couple insurance and debt

Meet the researchers: Arna Olafsson, Dan Silverman & Leandro Carvalho
Posted on April 30, 2020

Meet the winners of the TFI long-term research grant: Arna Olafsson (Copenhagen Business School), Dan Silverman (Arizona State University) and Leandro Carvalho (University of Southern California).

They will study how well spouses insure each other against financial risk, and what factors make couples better at providing themselves this kind of insurance support during hard financial times. Who are the researchers and what are the main goals and expected impact of this project?

When one spouse experiences a financial shock, such as a decline in income from work or unanticipated expenses for health or transportation, the other spouse might reduce their spending or increase their income and thereby provide some insurance to smooth the effects of the shock. This project will study the extent to which spouses insure each other against such financial shocks, and the reasons why within-couple insurance may be incomplete.

Studying this question is challenging because it is often difficult to observe, with sufficient detail, the income and spending of couples. The study will adopt an innovative approach that links survey information to individual-level administrative data on income, spending, and debt over time. This project will go further than previous studies by linking the survey and administrative data of spouses and provide an understanding of the financial circumstances of couples that is unprecedented in breadth. The administrative data contain the transaction and balance records of the checking, savings, credit card, and investment accounts of both spouses and permit analysis of the financial shocks experienced by couples and the impacts of these shocks on the consumption and the finances of each spouse. Also new to this study, the survey data will include experimental tasks in which participants make financial decisions on behalf of their spouses and decide how to share financial resources between the two of them. These tasks are tailored to reveal the reasons for incomplete within-couple insurance.

By revealing whether and why spouses insure each other against financial shocks, the project will help both public and private stakeholders understand what policies and products would work to help households better deal with uncertain financial times.

“Which couples uphold their vows to support for each other for richer and for poorer, and how do they do it?”

What motivated you to work together with the Think Forward Initiative?

We turned to the Think Forward Initiative to provide support for this project because the TFI is tightly focused on helping people make better financial decisions. TFI appreciates the importance of research for understanding the obstacles to better decision-making, and understands the challenges of translating research into practical solutions.

In our view, the challenges that spouses face in making joint decisions for a household are critical for their financial well-being. If our study can better explain those challenges and illuminate the ways in which couples overcome them, then this research should align well with TFI’s agenda.

How do you expect your research results to contribute to people’s financial well-being?

This project involves collaboration between the researchers and a bank that is interested in designing products to help their customers manage their financial lives. The findings of this research will therefore inform, directly, the services provided by this bank and, indirectly, other financial institutions to thereby help couples better address the financial challenges they face.

More generally, our research can give couples a better understanding of what helps spouses insure each other against financial ups and downs. Many will be interested to know, for example, how much spouses know about each other’s finances and how that knowledge is related to their financial preferences, choices, and outcomes. Informing public opinion on these topics should improve discourse on family dynamics and financial success.

Our study should also inform financial policy and product design. First, by measuring the extent of and variability in with-in couple insurance, the project can quantify the need for various social policies aimed at mitigating the effects of financial shocks. In times of fiscal strain, the private sector and (extended) families are often looked to as sources of social insurance. Our study will provide novel, quantitative evidence from advanced economy on the extent that families do this successfully and the reasons behind why they don’t.

The research team

Leandro Carvalho is a Research Scientist at the Center for Economic and Social Research at the University of Southern California (USC) and an Assistant (Research) Professor of Economics at USC’s Department of Economics. His main areas of research are household finance, behavioral economics, and development economics. Dr. Carvalho is an expert in designing online surveys and in adapting experiments tasks that are typically used in lab setting for administration through the Internet (Carvalho et al. 2016a; Banks, Carvalho, & Perez-Arce 2016; Carvalho and Silverman 2016).

Arna Olafsson is an Assistant Professor of Finance at Copenhagen Business School, a research fellow at the Danish Finance Institute, a research affiliate at CEPR, and a CEPR Household Finance Network Member. She received her Ph.D. from the Stockholm School of Economics in 2014 and spent two years as a visiting student at the Economics Department at UC Berkeley. Her main areas of research are household finance, behavioral finance, consumer credit, and labor and finance. A unifying theme in her research is the application of detailed individual-level panel data to answer important questions regarding the financial lives of individuals and households. Her current research analyzes transaction-level data on income, expenditures, bank account balances, and consumer credit stemming from a financial aggregator and a bank. Furthermore, she has collaborated with her data providers to merge this data with experimental data.

Dan Silverman is the Rondthaler Professor of Economics at Arizona State University. Prof. Silverman is a pioneer in the use of financial aggregator data for research purposes (Gelman et al. 2014) and has made important contributions to how we conceptualize and measure quality of decision-making (Kariv and Silverman 2013; Choi et al. 2014, 2016). He is a Research Associate of the National Bureau of Economic Research and co-editor of the American Economic Journal: Economic Policy.