Family Decision Making and Resource Protection Adequacy

This study examines the correlation between resource protection and the intrahousehold distribution of bargaining power. Using data from the Health and Retirement Study, the analysis quantifies potential changes in the surviving individual's living standard to evaluate the adequacy of resource protection. Individuals who generate a larger share of family income, are more financially knowledgeable, or have the "final say" in family decisions leverage their bargaining power to secure higher protection of their hypothetical widowhood living standard. Consequently, spouses with more bargaining power are less likely to experience declines of their living standard in the event of their spouse passing away and are more likely to be overprotected. ********** Surviving a spouse is often associated with the risk of changes to one's living standard. The ability to maintain in widowhood a living standard commensurate to the living standard of a couple is a function of accumulated human capital, savings and nonfinancial resources. Life insurance is one of the more widely available financial instruments designed to protect the noninheritable resources that determine the affordable living standard. Recent research reveals that a substantial number of households are not adequately protected against the potential change in the living standard associated with the loss of a spouse. The magnitude of financial vulnerabilities varies systematically with individual and household characteristics, displaying a significant gender bias (Auerbach and Kotlikoff 1991, Bernheim et al. 2003). Unfortunately, the available literature provides limited explanation as to why such observed variations exist. The goal of this study is to investigate the correlations between household resource protection and the distribution of bargaining power within a household with an emphasis on a hypothetical change in the surviving individual's affordable living standard. The analysis utilizes a traditional measure of bargaining power, the share of individuals' income in total household income, as well as direct measures of spouses' financial knowledge and decision-making power provided by the Health and Retirement Study (HRS) to demonstrate that the status of household resource protection is influenced by the intrahousehold distribution of bargaining power. There are important reasons to investigate the association between the protection of household resources and the balance of decision-making power within the family. Adverse consequences of insufficient protection of individuals who experience a loss of the income earner can be severe, particularly for elderly households and/or households with dependents. Many widows or widowers have to seek additional income opportunities to maintain their living standards or otherwise drastically reduce consumption. (1) Purchases of life insurance can improve the financial well-being of an individual in the event of a spousal death. However, spending on life insurance protection presents couples with an inherent conflict, as purchasing protection for a surviving spouse is costly. The more protection that a household chooses for either of the spouses, the less available resources it has in the present. This trade-off has a direct effect on the household's standard of living. The fact that many widows or widowers are poor (although couples are not) necessitates an investigation of reasons why couples fail to make the appropriate financial arrangements while both spouses are alive. (2) Uncovering the nature of the relationship between the level of resources available to a survivor and the distribution of bargaining power may have significant implications for policy implementation, consumer education and financial planners. Service providers seeking to assist individuals in selecting the appropriate amount of life insurance need to be cognizant of the decision-making dynamics within the household and the possible disconnect between utility levels derived from resource protection for each of the involved parties. …