Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Inequality A17-V4
Marriage is one of the most important determinants of economic prosperity, yet most existing theories of inequality ignore the role of the family. This paper documents that the cross-sectional distributions of earnings and wealth display a high degree of concentration, even when disaggregated into single and married households. At the same time, there is a large marriage gap: married people earn on average 27 percent more income, and they hold 34 percent more net worth. To account for these empirical facts, I develop a theory based on an otherwise standard incomplete-markets OLG model with ex-ante identical agents, who (i) are randomly selected into single or married households at the beginning of their economic lives; (ii) face uninsurable labor market risk henceforth; (iii) and make Pareto-efficient decisions if married. In a calibrated version of the model, I show that positive assortative matching, an effective tax bonus for married couples and directed bequests are key to explaining the marriage gap in earnings and wealth. A policy experiment of moving from joint tax filing for married couples to separate filing yields output and welfare gains.