Abstract

This paper aims to test recent influential theories proposing that differences in preferences of household members lead to agency problems reflected in overspending, indebtedness, and financial fee expenses at the household level. To do so, we use comprehensive transaction-level data from individuals within households. Observing individuals within households gives us a unique opportunity to empirically examine how individual revealed preferences over discretionary spending and individual patience affect spending and indebtedness at the household level. To deal with endogeneity, we use a fixed effects and instrumental variable approach, which helps us tackle both self-selection and common-shocks issues. We document that the share of household income received by the spender (impatient) spouse causally increases discretionary (total) spending at the household level, controlling for total household income. Moreover, we find that larger differences in household member patience increase debt and fee expenses at the household level. Our results are consistent with individuals having different preferences over spending and using expensive debt, which results in overspending and indebtedness at the household level.

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Citation

Olafsson, Arna and Michaela Pagel. "Family Finances: Intra-Household Bargaining, Spending, and Capital Structure." Columbia Business School, January 12, 2017.

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