Theory of Household Portfolio Choice: Pitfalls in Applications of the Collective Model

Azar Aliyev

Papers from arXiv.org

Abstract: A number of recent empirical papers rely on a collective model to analyze the portfolio choice of spouses, their heterogeneous risk preferences, and intra-household bargaining. I study applications of this model and highlight some important shortcomings. In its classic form, the model generates a counterintuitive result: an increase in the risk aversion of a household member can lead to an increase in household risk-taking. I offer a formal characterization of this pattern and link it to previous theoretical findings. I highlight further issues with applications of the collective approach to the portfolio choice problem in the contexts of bargaining and wealth inequality. I reconcile recent household finance papers with these findings and point to potential confusion in the literature. I emphasize existing alternatives that do not exhibit most of these issues, yet argue that there is a lack of a consistent and rigorous modeling approach.

Date: 2026-08
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