Strategy and Coordination in Risky Household Decisions (Job Market Paper)
Abstract: Do spouses successfully coordinate risk-taking decisions within the household? This paper uses a lab-in-the-field experiment with married couples in Bangladesh to show that most people hold mistaken beliefs about their spouses’ risk-taking behavior. In a sequential lottery-choice game, husbands and wives each selected a lottery while sharing the combined winnings from both. Under imperfect information about their spouse’s choice, only one in four subjects successfully coordinates their choice with their spouse’s so as to achieve their intended household risk-exposure level. Biased beliefs about the spouse’s choice led 23% of subjects to accept excessively risky lotteries and 24% to sacrifice profitable opportunities. Coordination failures are particularly pronounced when one spouse actively attempts to counter or ignore the other’s choice, a behavior typically shown by men. Measures of women’s bargaining power and non-cognitive skills help explain these gender differences. Coordination errors in the experiment predict biased beliefs about a spouse’s savings behavior for different purposes, such as investments in children and emergency needs. Failure to coordinate risky decisions impairs risk-sharing and increases the household’s vulnerability during times of stress. The size of the coordination error is positively associated with the likelihood that a household was forced to sell productive assets during an adverse shock, such as a drought, in the past twelve months.