Seminar Friday 31 January 2014

Bargaining over Risk. The Impact of Decision Power on Household Portfolios

Abstract
This paper investigates the internal financial decision-making process of households, employing a unique panel data set containing the disaggregated wealth of the entire Swedish population over seven years. We utilize a source of exogenous variation in sex-specific labor demand to show that the distribution of decision power among spouses is a driving force behind the aggregation of spouses' preferences on financial decision making. As the decision power of female spouses increases, participation in risky asset markets decreases, the share of wealth allocated to risky investments decreases, the riskiness of the portfolio decreases, and idiosyncratic risk decreases. We also study the effect of underdiversification on household welfare. Women are more aware of the household's limited investment skills and exert their decision power to reduce the economic cost from under diversification.

Contact: Herdis Steingrimsdottir