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Missing Contracts: On the Rationality of not Signing a Prenuptial Agreement

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  • Antonio Nicolo'

    (Department of Economics University of Padua)

  • Piero Tedeschi

    (Department of Statistics University 'Bicocca' of MIlan)

Abstract

Many couples do not sign prenuptial agreements, even though this often leads to costly and inefficient litigation in case of divorce. In this paper we show that strategic reasons may prevent agents from signing a prenuptial agreement. Partners which have high productivity in marital activities wish to signal their type by running the risk of a costly divorce. Hence this contract incompleteness arises as a screening device. Moreover, the threat of costly divorce is credible since the lack of an ex-ante agreement leads to a moral hazard problem within the couple, which induces partners to reject any ex-post amicable agreement, under specific circumstances. We also investigate conditions that make this contract incompleteness an optimal form of contracting and we briefly discuss the effects of enforceable and/or mandatory premarital agreements on the rate of divorce and on the social welfare. Finally, our model suggests that there is no major objection in making prenuptial agreements enforceable, but also that there are not good reasons to make them mandatory.

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File URL: http://128.118.178.162/eps/game/papers/0406/0406001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0406001.

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Length: 50 pages
Date of creation: 04 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpga:0406001

Note: Type of Document - pdf; pages: 50
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Web page: http://128.118.178.162

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Keywords: asymmetric information; incomplete contracts; prenuptial agreement.;

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  1. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  2. Bordignon, Massimo & Brusco, Sandro, 2001. "Optimal secession rules," European Economic Review, Elsevier, vol. 45(10), pages 1811-1834, December.
  3. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  4. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
  5. Hermalin Benjamin E., 2002. "Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-21, July.
  6. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  7. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-32, September.
  8. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  9. Dye, Ronald A, 1985. "Costly Contract Contingencies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 233-50, February.
  10. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
  11. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
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