Cohabitation and Marriage in a Risky World

Different couples are analyzed in presence of income uncertainty and precautionary saving. Married couples have legal restrictions on their relationship that force them to act cooperatively, while cohabitants with limited commitment act non-cooperatively. This makes risk sharing different for different couples; married couples share risk completely, while cohabitants share risk to a lesser extent due to their lack of commitment and cooperation. This makes precautionary savings greater for cohabitants than for married couples. However, cohabitants also tend to undersave to possibly increase assistance from their partner. However, mutual altruism mitigates the inefficiencies and enforces time consistent risk sharing among cohabitants.