Staying Together Forever? Life-Cycle Effects of Overoptimistic Couples

In the United States, 35–40% of all marriages end in divorce. Yet, we provide survey evidence that, on average, married respondents expect a divorce likelihood of 15%, with most respondents significantly underestimating their predicted divorce risk. Our survey reveals that individuals with more overoptimistic divorce expectations exhibit higher within-couple inequality in market hours and earnings and accumulate significantly less wealth than their rational counterparts. Building on this evidence, we incorporate overoptimistic divorce expectations into a household life-cycle model with endogenous accumulation of human capital, assets, and ex-ante heterogeneity in spouses’ wages. Couples jointly choose their market hours, home production, and joint savings. We quantify the model using U.S. microdata and show that overoptimism leads to (1) higher within-couple specialization and (2) lower savings, as overoptimistic lower-wage spouses fail to internalize the insurance value of human capital and assets in the event of divorce. Overoptimism during marriage persists beyond divorce through lower assets and human capital upon divorce, with particularly adverse consequences for the lower-wage spouse. The model thus provides a novel explanation for the high poverty rates observed among divorced mothers. Finally, we show that joint taxation of married couples amplifies specialization among overoptimistic couples.