UC Santa Barbara

This dissertation concerns various types of economic shocks and the implications of such shocks on the decisions of households. There has been a long history in the theoretical economics literature of modeling agents as forward-looking and thus in making their life-cycle decisions they will have accounted for the paths they expect their income, wealth, or economic opportunities to take. Therefore, these chapters will focus on households' responses to unexpected changes in economic factors. The two types of economic shocks to be explored are income shocks, a shock that will affect only one spouse, and house price shocks, a shock that affects both spouses. Particular care is given to trying to identify exogenous and unexpected changes in income or wealth for the households. The asymmetric responses to financial gains versus losses are explored for each type of shock.

Throughout the analyses are conducted using longitudinal data on individuals or households. These data allow for observations of the sample household through a long portion of its life cycle and through changes in their economic situation. In the first chapter, I explore the effects of unpredicted changes in permanent income of each spouse on the probability of divorce for the couple. I find that if the husband experiences a negative income shock, the probability of divorce increases. If the wife experiences a negative income shock, this effect on divorce is only true if she had a switch into unemployment. In Chapter 2, I continue the analysis of economic shocks on probability of divorce by looking at responses to local house price shocks. These local housing prices give us changes in wealth for the households that are exogenous to many of the other decisions an individual household makes. In response to a positive house price shock, the risk of divorce decreases for couples. Finally in the third chapter, I analyze the effect of housing prices on another household behavior: labor supply choices. Married female homeowners are less likely to be employed following a positive house price shock in their metropolitan area. Conversely, older married male homeowners are more likely to be employed when there are negative house price shocks in their area.