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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 consumption 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 definition, is completely lost in the case of divorce) and thereby limit the attractiveness of spouses outside opportunities. This strategy is shown to be optimal. More surprisingly, 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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