Overinvestment in Marriage-Specific Capital
AbstractWe 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 con- sumption 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 de?nition, is completely lost in the case of divorce) and thereby limit the attractiveness of spouses outside opportunities. This strat- egy is shown to be optimal. More suprisingly, 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.
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Bibliographic InfoPaper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2012-29.
Date of creation: 2012
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Marriage; Investment; Durable Goods; Specific Capital; Risk.;
Find related papers by JEL classification:
- D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-02 (All new papers)
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