Risk, cohabitation and marriage

Abstract

This paper introduces imperfect information,learning,and risk aversion in a two sided matching model.The modelprovides a theoreticalframework for the com- monly occurring phenomenon of cohabitation followed by marriage,and is con- sistent with empirical findings on these institutions.The paper has three major results.First,individuals set higher standards for marriage than for cohabitation. When the true worth of a cohabiting partner is revealed,some cohabiting unions are converted into marriage while others are not.Second,individuals cohabit within classes.Third,the premium that compensates individuals for the higher risk involved in marriage over a cohabiting partnership is derived.This premium can be decomposed into two parts.The first part is a function of the individual ’s level of risk aversion,while the second part is a function of the di difference in risk between marriage and cohabitation.