MARRIAGE, MARKETS, AND MONEY: A COASIAN THEORY OF HOUSEHOLD FORMATION

AuthorMei Dong,Kenneth Burdett,Ling Sun,Randall Wright
Date01 May 2016
Published date01 May 2016
DOIhttp://doi.org/10.1111/iere.12160
INTERNATIONAL
ECONOMIC
REVIEW
May 2016
Vol. 57, No. 2
MARRIAGE, MARKETS, AND MONEY: A COASIAN THEORY OF HOUSEHOLD
FORMATION
BYKENNETH BURDETT,MEI DONG,LING SUN,AND RANDALL WRIGHT1
University of Pennsylvania, U.S.A.; University of Melbourne, Australia; Brock University,
Canada; University of Wisconsin–Madison,Federal Reserve Banks of Chicago and Minneapolis,
and NBER, U.S.A.
This article integrates search-based models of marriage and money. We think about households as organizations, the
way Coase thinks about firms, as alternatives to markets that become more attractive when transactions costs increase.
In the model, individuals consume market- and home-produced goods, and home production is facilitated by marriage.
Market frictions, including taxes, search, and bargaining problems, increase the marriage propensity. The inflation tax
encourages marriage because being single is cash intensive. Microdata confirm singles use cash more than married
people. We use macrodata over many countries to investigate how marriage responds to inflation, taxation, and other
variables.
1. INTRODUCTION
This is an essay on search-theoretic models of partnership formation—e.g., marriage, although
the ideas also apply to cohabitation, living with one’s parents, taking on roommates, and other
notions of a household. A contribution over existing search-based analyses of partnership
formation is that we embed this process into a general equilibrium model that incorporates
goods markets with explicit frictions. The result is a framework that, despite having many
ingredients, is very tractable. In particular, it delivers sharp analytic predictions concerning how
partnership formation depends on frictions in the marketplace. We take these predictions to
the data.
What is a household? For us, it is an institution for organizing economic (and other) activity.
To understand this, it helps to recall how economists contemplate other institutions, like firms.
In a genuinely classic paper, Coase (1937) asks why the economy has some activity organized
within firms, as opposed to exclusively self-employed individuals who contract with one another
as needs arise. Production could in principle be carried on without organizations like firms, he
says, with all activity orchestrated by the market. Why do entrepreneurs hire people into
production teams? When does this dominate contracting out individual tasks? If markets are
Manuscript received January 2014; revised January 2015.
1We thank Linda Wong, Scott Schuh, Michelle Tertilt, Francesco Lippi, Alexander Wolman, Andrew Hertzberg, Hal
Cole, and two referees for insightful comments. We also thank conference or seminar participants at Penn, Princeton,
Wisconsin, NYU, Toronto, Aarhus, Essex, the Minneapolis and Chicago Feds, the SED, and the European Search and
Matching Conference in Cyprus. Wright thanks the NSF and the Ray Zemon Chair in Liquid Assets at the Wisconsin
School of Business for support. Dong acknowledges financial support under the Australian Research Council’s DECRA
scheme (project number DE120102589). The views expressed here are those of the authors and not the Federal Reserve
System or any Federal Reserve Bank. Please address correspondence to: Randall Wright, Department of Economics,
University of Wisconsin, Grainger Hall - 975 University Ave., Madison, WI 53715. E-mail: rwright@bus.wisc.edu.
337
C
(2016) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social
and Economic Research Association
338 BURDETT ET AL.
efficient, it should not be preferable to hire people into a firm, instead of purchasing goods and
services when they are necessary.
Coase argues, however, that there are transactions costs in markets, related to the frictions
embodied in modern search-and-bargaining theory:
The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the
price mechanism. The most obvious cost of “organizing” production through the price mechanism is
that of discovering what the relevant prices are. ...The costs of negotiating and concluding a separate
contract for each exchange transaction which takes place on a market must also be taken into account.
In addition, he emphasizes the effects of various policy interventions:
Another factor that should be noted is that exchange transactions on a market and the same transactions
organized within a firm are often treated differently by Governments or other bodies with regulatory
powers. If we consider the operation of a sales tax, it is clear that it is a tax on market transactions
and not on the same transactions organised within the firm. Now since these are alternative methods of
“organisation”—by the price mechanism or by the entrepreneur—such a regulation would bring into
existence firms which otherwise would have no raison d’etre. ...Similarly, quota schemes, and methods
of price control which imply that there is rationing, and which do not apply to firms producing such
services for themselves ...encourage the growth of firms.
Thus, firms help avoid costs and inconveniences associated with markets. There are limits
to what can be produced internally, perhaps, due to decreasing returns, so markets still have
a role—but firms’ very existence indicates that markets are not frictionless and that these
institutions ameliorate search, bargaining, taxation, and other imperfections in markets. For
instance, an entrepreneur may sometimes need legal, accounting, or secretarial services, all of
which are available on the market—one can try to find independent contractors to perform such
duties, but that involves transactions costs. When these costs are high, it is worthwhile to bring
some of this activity in house, by setting up a legal team, accounting department, or secretarial
pool. This is the genesis of a firm.2
Coase (1992) suggests his approach might help us understand other organizations. Here we
study households, with families as a leading example. Now, a narrow reading of Coase might
suggest the theory does not apply to families, because he said it was important for a firm to have
an “employee and employer” relationship resembling a “slave and master” relationship: Work-
ers are not independent contractors but subject to direction and control by firms. Still, we think
households can be profitably analyzed using Coasian logic, even if they better resemble happy
families or partnerships than “slave–master” relationships. As with legal, accounting, or secre-
tarial services for entrepreneurs, many goods and services individuals demand can be provided
by the market or within the household, including cooking, cleaning, child care, and even compan-
ionship. If the costs of using markets are high, then individuals, like entrepreneurs, are inclined
to bring more activity in house, especially when market and home commodities are good substi-
tutes and when home production is enhanced by forming a household that operates as a team.
We are not proposing that a transitory blip in sales taxes will trigger a stampede to the altar, but
it seems plausible that when people find themselves in a longer term situation where the cost of
using markets is high, they are more inclined to set up households and engage to a greater extent
in home instead of market activity. This is not to deny the importance of love, but economic
considerations are obviously also relevant—as Becker (1988) put it, “For centuries marriages,
births, and other family behavior have been known to respond to fluctuations in aggregate
output and prices.” When finding an acceptable partner takes time and other resources, as
2Coase considered other candidates for a theory of firms, including specialization, risk allocation, and the idea that
entrepreneurs have better knowledge or judgment. He dismissed these, however, since in principle they can be handled
by markets: “What has to be explained is why one integrating force (the entrepreneur) should be substituted for another
integrating force (the price mechanism).” Alchian and Demsetz (1972) subsequently argued team production is more
efficient than individuals working at arm’s length through markets, but success depends on managing opportunistic
behavior, which is more effective if the monitor is residual claimant. Monitoring is not incorporated here, but that might
be an interesting extension.
MARRIAGE,MARKETS,AND MONEY 339
is standard in search theory, rational individuals use reservation strategies, stopping when the
benefits of forming a partnership outweigh those of continued search. The goal is to characterize
rigorously how these strategies depend on parameters related to market frictions. This requires
a formal model with many elements, but each component in the setup presented below is
incorporated for a reason.
First, for a theory about substitution between households and markets, it is important to use
a general equilibrium framework where agents engage in more than just looking for partners.
Second, our goods markets must have tax, search, and bargaining frictions to accommodate
the Coasian logic. Third, it is useful to have endogenous labor supply because that actually
simplifies the analysis a lot. Fourth, although this is not needed in the baseline model, we
develop a monetary version for the following reason: While many frictions influence partnership
formation, taxation is one for which data are readily available. We have some data on sales and
income taxes, but for the inflation tax there is far more information. To use this, we integrate
the theory of marriage with a now-standard search-based model of monetary exchange. In this
setting, money makes markets function better, but this is hindered by inflation.
There is evidence that items provided either in the home or by the market—e.g., food—are
more likely purchased on the market by singles (Simon et al., 2010; Wong, 2012). Although
these goods are not always purchased with cash, they are purchased that way more than home
goods, which are not even traded, let alone traded for money (with exceptions like paying kids
for chores). Intuitively, singles go out more—e.g., on a date—which uses money more than
activities like family dinners. This suggests being single is cash intensive (with exceptions like
paying the nanny). We investigate this systematically, using several sources of microdata, and
find they are very much consistent with this suggestion. Thus inflation, which is a tax on money
balances, whether in your wallet or a low-interest checking account, makes the market less and
marriage more attractive. We examine a panel of countries with considerable variability in tax
and inflation rates to see how marriage is affected by these and other macrovariables. There is
support for the hypothesis that taxation increases marriage rates and fairly strong support that
inflation does.3
We are not the first to notice a similarity between households and firms. Becker (1973) says
“marriage can be considered a two-person firm with either member being the ‘entrepreneur’
who ‘hires’ the other,” and search theorists often use their equations almost interchangeably to
discuss marriage or employment (Burdett and Coles, 1997, 1999). But it is novel to apply Coasian
logic to household formation in general equilibrium, even if similar ideas appear elsewhere,
usually in a less formal guise.4The article is also related to literatures on home production
(Greenwood et al., 1995; Gronau, 1997), quantitative macromodels of marriage (Fernandez
et al., 2005; Knowles, 2007), and estimated micromodels (Wong, 2003; Jacquemet and Robin,
2011). Also related is work on the effect of tax codes on marriage (Alm and Whittington,
1999; Chade and Ventura, 2002; Bick and Fuchs-Schundeln, 2012; Guner et al., 2012). Other
related research is surveyed by Rupert (2008), Siow (2008), and Chiappori and Donni (2009).
Without denying the importance of alternative factors, we want to put a Coasian position up
for consideration.
3The inflation effect emerges in the model interpreted narrowly because it taxes money holdings, which are ceteris
paribus higher for singles. More broadly, inflation can stand in for (is associated with) a variety of problems, including
corruption, transportation costs, a poor legal system, etc., that encourage substitution out of market and into household
activity.
4See, e.g., Ben-Porath (1980), Pollak (1985), Treas (1993), or Raz-Yurovich (2012). In gender studies, in particular,
Jacobsen (2007) says: “Household production activities are time-consuming to contract for separately. In order to
duplicate the activities of one household member performing nonmarket activities, it may be necessary to hire a
maid, cook, butler, plumber...” Moreover, “The ability to specialize and thereby increase per capita output available
to household members is the factor most cited by economists in considering the economic rationale for household
formation.” However, “it is not obvious ... it is necessary for persons to live together in order to reap the benefits from
specialization and trade. This model is also applied to trade between countries, but does not imply that countries should
also merge.” We agree with these views and want to pursue them, using more rigorous general equilibrium and search
theory.

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