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Efficiency of Family Bargaining Models with Renegotiation: The Role of Transferable Utility across Periods

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  • Elisabeth Gugl
  • Linda Welling

Abstract

In dynamic family bargaining models, it is often assumed, for simplicity, that spouses have transferable utility as well as identical and constant marginal rates of intertemporal substitution. It has been argued that as long as spouses are at an interior solution, renegotiation does not hinder efficiency. We show that identical and constant marginal rates of intertemporal substitution (i.e., transferable utility across periods) are the source of this efficiency result. Even at an interior solution, renegotiation can cause inefficiency if marginal rates of intertemporal substitution are not constant. Our model is the first to both identify this source of inefficiency in a bargaining model in which the threatpoints of later periods are determined endogenously and demonstrate that there is no one-size-fits-all policy regulating divorce that can restore efficiency when couples are allowed to differ in their initial wage rates and/or preferences.

Suggested Citation

  • Elisabeth Gugl & Linda Welling, 2017. "Efficiency of Family Bargaining Models with Renegotiation: The Role of Transferable Utility across Periods," Studies in Microeconomics, , vol. 5(1), pages 53-83, June.
    • Handle: RePEc:sae:miceco:v:5:y:2017:i:1:p:53-83
    DOI: 10.1177/2321022217696152
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    References listed on IDEAS

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    1. Elisabeth Gugl & Linda Welling, 2012. "Time with sons and daughters," Review of Economics of the Household, Springer, vol. 10(2), pages 277-298, June.

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