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Interesting Post on Spousonomics

Posted by Rob Costa on September 16, 2011

Wedding Ring Photo by Jeff Belmonte from Cuiabá, Brazil (Flickr) [CC-BY-2.0 (www.creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsAn old interview on Spousonomics featuring Justin Wolfers and Betsey Stevenson popped up on Twitter today. It was an interesting—if tongue-in-cheek—look at economics and marriage. Put another way, it is like a well-written relationship advice column that crossed with an economics textbook. There were a couple of points that I thought were interesting opportunities for elaboration.

Wolfers: Because Betsey and I earn similar incomes, we would pay a marriage penalty.  The U.S. has a household-based taxation system which subsidizes married families when one person stays home and taxes most people extra if they choose to marry and both work full-time.  The average tax cost of marriage for a dual-income couple is $1,500 annually.  When our accountant ran the numbers for us a few years back we discovered marriage would cost us substantially more.  I love Betsey and all, but is the marriage certificate worth thousands of dollars annually?

By “marriage penalty”, Mr. Wolfers is referring to a phenomenon that results from how income tax is paid in the United States. Although his explanation is accurate, I want to expand on it because I feel that this is a misunderstood concept. An individual’s marginal tax rate (the rate paid on the next dollar earned) is determined by how much he is earning. He falls into one of several possible tax brackets. When dealing with a married couple, the thresholds for these brackets are higher (a given income equates to a lower tax rate), but they do not double. So if both members of a couple earn the same amount, their income when married is twice that when single and they pay more taxes. In contrast, if one spouse acts as a home-maker and does not earn any substantial income, then the couple would find themselves paying less taxes than the breadwinner would if he were single.

Although the term “marriage penalty” has been in use for decades, it is not entirely accurate. The reality is a dual-earner penalty. As Wolfers points out, couples with a single primary-earner actually get a marriage bonus. This is also why it is not an entirely cut-and-dry policy matter. If the thresholds for the tax brackets of married couples were simply twice as large as those for single individuals, it would eliminate the penalty for dual-income households, but it would only add to the subsidy received by single-income couples. This also ignores that there are certain economies of scale to be had from increasing household-size. Expenses for two people are not really twice what they are for one. The “marriage penalty” is what economists call a normative issue, something to be decided according to values and not a cut-and-dry efficiency argument.

Wolfers: The principle of comparative advantage tells us that gains from trade are largest when your trading partner has skills and endowments that are quite  different from yours.  I’m an impractical bookish Harvard-trained empirical labor economist, while Betsey is an impractical and bookish Harvard-trained empirical labor economist.  When your skills are so similar, the gains from trade aren’t so large.

[…]

Stevenson: That model—the old Becker-style model in which one person specializes in household production while the other specializes in market production—is outdated.  Justin and I have emphasized in our research that technological change along with other societal changes have eroded the efficiency gains from marriage and increased the value of consumption complementarities.  So our partnership isn’t about getting more done through gains from trade, it’s about having more fun because we like the same things.

I learned the Becker model of household production in school and I found it to be utterly fascinating. Several equations were able to capture the value added in a home-cooked dinner or in accumulated expertise. Clearly Stevenson and Wolfers are right though, the implication that households specialize with only partner entering the labor market and the other focusing on home making does not generally apply to the developed world today. In a typical middle-class household, both partners are well-educated, both are capable of working, and if they do find that they are lacking for prepared food or housekeeping, they can simply buy those with their extra earnings.

Incidentally, “consumption complementarities” made me smile because it is evidently how people with Economics PhDs say that they like to spend time with their spouses. It is perfectly true though, the main gains from marriage in a developed nation are due to enjoying the company and exploring shared interests, not from finding someone to cook and clean. Although to Becker’s credit the model is still useful and wonderfully interesting. One might even say that it was progressive for recognizing the value of home-making.

Wolfers: Moral hazard reflects asymmetric information, such as when someone behaves differently—often selfishly—when they know their partner is unaware of their choices.

Stevenson: And so we’ve eliminated the inefficiency caused by moral hazard, by eliminating the asymmetric info.  How?  We each have a commitment to telling the truth.  Tell the truth, and there’s no asymmetric info.

In the context of a marriage, moral hazard exists because one partner cannot perfectly observe the other (asymmetric information). So one partner could, theoretically get away with actions that the other would find unacceptable. Stevenson and Wolfers offer a solution that would make every relationship advice columnist proud. They spend time together. They enjoy each other’s company and interests well enough that they like to spend time together (see above). They communicate. They are comfortable communicating because each knows that the other will not be angry and unreasonable.

Information is the solution to moral hazard. Another example of this is when an insurance company offers a discount for disclosing more information. For instance, Progressive is advertising that they offer a discount for customers who install an electronic monitoring device in their cars. Some people may feel more comfortable giving information to someone they love than to an insurance company, but the concept is similar.

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