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Overinvestment in Marriage-Specific Capital

  • Olivier Donni

    ()

    (THEMA, Universite de Cergy-Pontoise)

We consider the decisions of a married couple in a risky environment. The distribution of spouses bargaining power may change as a consequence of new outside opportunities that are offered to them, so that individual con- sumption may fluctuate over time. This is what we call "bargaining risk". To reduce this risk, the spouses may decide to over-invest in marriage-specific capital (which, by de?nition, is completely lost in the case of divorce) and thereby limit the attractiveness of spouses outside opportunities. This strat- egy is shown to be optimal. More suprisingly, over-investment in marriage- specific capital is still an optimal strategy when spouses are confronted to a (small) risk of divorce. This contrasts with the usual intuition.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2012-29.

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Date of creation: 2012
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Handle: RePEc:ema:worpap:2012-29
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