Tuesday, 7 April 2015

It turns out that diamonds aren't forever

Or at least spending more on engagement rings is associated with shorter, rather than longer, marriages. So says a SSRN paper last year by Andrew Francis and Hugo Mialon of Emory University, which has been sitting on my must-read-this list for far too long. The wedding industry would have us believe that more extravagant weddings are associated with longer-lasting weddings. However, Francis and Mialon find:
...little evidence that expensive weddings and the duration of marriages are positively related. On the contrary, in multivariate analysis, we find evidence that relatively high spending on the engagement ring is inversely associated with marriage duration among male respondents. Relatively high spending on the wedding is inversely associated with marriage duration among female respondents, and relatively low spending on the wedding is positively associated with duration among male and female respondents.
What might be causing this observed negative relationship between wedding expenses and marriage duration? The authors posit that expensive weddings create more debt-related stress, and that may create problems for the marriage. They show that:
...in the sample of all persons, sample of men, and sample of women, spending less than $1,000 on the wedding is associated with an 82% to 93% decrease in the odds of reporting being stressed about wedding-related debt relative to spending between $5,000 and $10,000.
However, as I discussed in this post last year, weddings are a way of couples' signalling the quality of their wedding to others. Signalling is necessary when you have a problem of asymmetric information. At the risk of repeating myself, I'll quote from that earlier post. A problem of asymmetric information:
...happens when one party (the informed party) has private information that the other party (the uninformed party) doesn't know, and (importantly) the informed party uses that information to their advantage and to the detriment of the uninformed party. The classic example that we use in ECON100 and ECON110 is the used car market. Sellers know the quality of the car, but buyers don't. Since buyers don't know whether they are being offered a good car or a lemon until after they have bought it, sellers can easily misrepresent the car as being good quality even if it is a lemon.
Crucially, asymmetric information is only a problem if it leads to market failure. In the used car market example, since buyers don't know the quality of the cars in the market, they have to assume that any car on offer is low quality. This lowers the amount that they are willing to pay for a car, and drives the good quality cars out of the market (since sellers of good quality cars can't convince buyers of the quality of their cars, and buyers aren't willing to pay enough to buy them). The market for good cars collapses (of course, the market has developed mechanisms that deal with this market failure, such as test drives, pre-purchase inspections, etc.). We call this an adverse selection problem, since those that select to remain in the market are those with the lowest quality cars (when at least some buyers want those with the highest quality cars, not the lowest quality)...
Signalling is one way that markets have adapted to deal with adverse selection problems. With signalling, the informed party finds a way to credibly reveal the private information to the uninformed party. There are two important conditions for a signal to be effective: (1) it needs to be costly; and (2) it needs to be more costly to those with lower quality attributes. These conditions are important, because if they are not fulfilled, then those with low quality could still signal themselves as having high quality. Sticking with used cars as an example, offering a warranty on the car is a good example of signalling. It is costly (since if the car breaks down, the seller must pay the cost of repair), and it is more costly to those with low quality cars (since they are more likely to break down).
How does this apply to weddings? Couples have private information that wedding guests don't know about: (1) the quality of their relationship; and (2) their social status. Again, quoting from my earlier post on the topic of weddings:
Starting with (1), guests don't know the quality of the relationship that is about to be formalised, but the couple does (hopefully!). Does this create market failure? That is, can the couple take advantage of this information asymmetry to their advantage and to the detriment of their guests? Maybe, if we consider wedding gifts. Guests would probably give less valuable gifts if they believed the marriage wouldn't last (i.e. if the marriage is low quality), than if they thought it would last a long time (i.e. high quality). So, if guests can't be sure about the quality of the marriage, then they may assume the marriage is lower quality and buy less expensive wedding gifts (or no gift at all) as a result. So, high-quality couples need to find some way of signalling their quality, and this may be through the cost of the wedding. This may be an effective signal, because it is costly (obviously), and more costly to low-quality couples since they may expect to marry more than once over their lifetime. So, lower quality couples may be less willing to spend a lot on their wedding than high quality couples.
What about (2)? This isn't an adverse selection problem at all, since there is no market that will fail. However, there is still signalling here - the couple may want to signal their social status to the community. Higher social status is linked with wealth, which means that couples with high social status are likely to be able to afford a more lavish wedding celebration than couples with lower social status. This is of course conspicuous consumption (where spending is intended as a way of maintaining or attaining social status). And, there is at least some evidence to support this (gated, here is an earlier ungated version) - even though the evidence is from India, it doesn't seem much of a stretch that there is something similar at play in a lot of weddings in the western world as well.
Now if we believe what I wrote about signalling above, then we should expect more expensive weddings (or engagement rings) to be associated with more successful (i.e. longer) marriages, not shorter marriages. So, what is going on? I think that there is a crucial conflict between the two types of signalling I discussed above. In the first case, the couple are trying to signal that their relationship is high quality and will only tend to do so (the payoff is only worth it) if the relationship is indeed high quality. So holding social status constant, higher wedding spending should increase marriage duration. In the second case, the couple will increase their wedding expenditure to signal high social status even if their relationship is not high quality. So holding relationship quality constant, higher social status should increase marriage duration. These results are in conflict for couples whose relationship is low-quality, but who want to signal high social status.

Francis and Mialon's results provide some support for both propositions. If we take some of their variables (respondent-spouse differences in age, race, and education; whether they knew their spouse very well before marriage; the length of time they dated before marriage) as indicators of relationship quality, those variables are statistically significantly associated with marriage duration in the expected direction after controlling for income and education (both of which are indicative of social status). And higher income and higher education are both positively associated with marriage duration (controlling for the relationship quality variables). To investigate these relationships more thoroughly though, it would have been good to test whether interactions between wedding expenditure and the relationship quality variables, or between wedding expenditure and income or education, were statistically significant. That is, are there differences in the relationship between marriage duration and wedding expenditure between high-quality and low-quality relationships, and between high income (or education) and low income (or education) couples?

On another note, the couple's private information (about their relationship quality) might not be kept private from all potential wedding guests - some will know more than others. We can expect guests to be less likely to attend a wedding if they expect that the couple's relationship is low quality (e.g. if they believe the marriage will not last). Francis and Mialon find some support for this as well. Wedding attendance is strongly associated with marriage duration - higher wedding attendance was significantly associated with longer marriage duration.

Finally, Hugo Mialon must have one of the most interesting research portfolios. I've blogged before about one of his papers on the economics of faking orgasm (ungated here).

[HT: Marginal Revolution, last October]

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