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Should We Write Prenuptial Contracts?

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  • Helmut Rainer

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Abstract

When a marriage dissolves, a couple usually divides all marital assets according to the division rule imposed upon them by the state. The present paper uses incomplete contract theory to study the interplay between the state�s division rule and a married couple�s investment in relationship-specific assets. The inability of spouses to contract upon their specific investments, leads them to choose less than the first-best level of investment. To the extent that this underinvestment poses a threat to the stability of marriage, this creates a role for the use of ex ante separation agreements that stipulate the allocation of marital assets upon divorce. We examine the type of contractual structure that the partners should optimally adopt at the outset of marriage. The implications of our results are then applied in the context of various asset division rules discussed by policy makers.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 572.

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Date of creation: 05 Dec 2003
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Handle: RePEc:esx:essedp:572

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