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Overinvestment in Marriage-Specific Capital

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  • Olivier Donni

    (THEMA, Universite de Cergy-Pontoise)

Abstract

We consider the decisions of a married couple in a risky environment. The distribution of spouses bargaining power may change as a consequence of new outside opportunities that are offered to them, so that individual consumption may fluctuate over time. This is what we call "bargaining risk". To reduce this risk, the spouses may decide to over-invest in marriage-specific capital (which, by definition, is completely lost in the case of divorce) and thereby limit the attractiveness of spouses outside opportunities. This strategy is shown to be optimal. More surprisingly, over-investment in marriage- specific capital is still an optimal strategy when spouses are confronted to a (small) risk of divorce. This contrasts with the usual intuition.

Suggested Citation

  • Olivier Donni, 2012. "Overinvestment in Marriage-Specific Capital," THEMA Working Papers 2012-29, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2012-29
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    Cited by:

    1. Donni, Olivier & Molina, José Alberto, 2018. "Household Collective Models: Three Decades of Theoretical Contributions and Empirical Evidence," IZA Discussion Papers 11915, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Marriage; Investment; Durable Goods; Specific Capital; Risk.;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure

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