Spousal Insurance, Outside Options and Wage Bargaining

Spousal insurance raises a worker's outside option, allowing workers to bargain a higher wage. To study this mechanism I propose a random search model with ex-ante heterogeneity in ability, endogenous marriage, endogenous labor supply of spouses and wages determined by Nash Bargaining. Using the model, I derive an empirical specification to test the mechanism and the sources of endogeneity to be addressed. I use a combination of an instrument derived from theory and one instrument based on policy variation to confirm the predictions of the model. A 1 percentage point increase in the share of married women working increases the wage of married individuals by 2.51-3.51%.