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Household Behavior and Optimal Property Division upon Divorce

Author

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  • Sarolta Laczo

    (Bank of England and IAE-CSIC)

  • Arpad Abraham

    (European University Institute)

Abstract

The objective of this paper is to study the optimal property division upon divorce in a framework where spouses share risk subject to limited commitment. First, we consider a simple model, where marriage is beneficial for two reasons: (i) it provides (partial) insurance against individual income shocks, and (ii) spouses may enjoy direct individual benefits from the match, `love,' which is stochastic, as in Voena (AER, forthcoming). We highlight analytically that the optimal property division rule is subject to a trade-off between intra-household risk sharing and insurance across marital statuses. Allocating less household assets to the party filing for divorce improves risk sharing while married, but worsens consumption smoothing for divorcees. Second, we turn to a quantitative/empirical exercise, where the key parameters are estimated using panel data from the United Kingdom. Then the optimal policy, as well as counterfactuals are computed.

Suggested Citation

  • Sarolta Laczo & Arpad Abraham, 2015. "Household Behavior and Optimal Property Division upon Divorce," 2015 Meeting Papers 1041, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1041
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    References listed on IDEAS

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    1. Mike Brewer & Anita Ratcliffe & Sarah dSmith, 2012. "Does welfare reform affect fertility? Evidence from the UK," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(1), pages 245-266, January.
    2. Alessandra Voena, 2015. "Yours, Mine, and Ours: Do Divorce Laws Affect the Intertemporal Behavior of Married Couples?," American Economic Review, American Economic Association, vol. 105(8), pages 2295-2332, August.
    3. Narayana R. Kocherlakota, 1996. "Implications of Efficient Risk Sharing without Commitment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 595-609.
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    Cited by:

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    2. Hanno Foerster, 2019. "The Impact of Post-Marital Maintenance on Dynamic Decisions and Welfare of Couples," Boston College Working Papers in Economics 982, Boston College Department of Economics.

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