Intra-Household Risk Sharing in Collective Portfolio Choice Models

Using a collective life-cycle portfolio choice model, we show that the share of
wealth in stocks increases with intra-household heterogeneity in relative risk
aversion. This result arises from efficient intra-household risk sharing that
implies a consumption sharing rule where the more risk tolerant partner op-
timally absorbs a higher variation in household consumption, a mechanism
that optimally generates a higher share of wealth in stocks. We emphasize
that the risk sharing channel is distinct from the risk diversication chan-
nel given that the former also applies to single-income couples. We provide
supportive empirical evidence for the model's key prediction.