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The Price of Breaking Up: Wage Shocks and Household Dissolution

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  • Velilla, Jorge

    (University of Zaragoza)

  • Molina, José Alberto

    (University of Zaragoza)

  • Chiappori, Pierre-André

    (Columbia University)

Abstract

Household dissolution is a key concern in family economics, with implications for individual welfare, child outcomes, income trajectories, or wealth, which ultimately impact inequality and vulnerability. This paper examines how wage dynamics relate to the stability of dual-earner households, using a collective model with limited commitment, where spouses commit to future behavior subject to individual rationality constraints, allowing for renegotiation of intrahousehold arrangements or household dissolution. We use data from the PSID over 1999-2019, and estimate how spouses’ wage changes relate to divorce, accounting for observed behaviors, demographics, and unobserved heterogeneity. The results show that large negative wage changes significantly increase the likelihood of divorce, while positive changes have no effect, as the model predicts. This pattern is consistent with asymmetric intrahousehold insurance, highlighting the role of economic risk and bargaining asymmetries in shaping family dynamics, and informs policies targeting household vulnerability to income shocks.

Suggested Citation

  • Velilla, Jorge & Molina, José Alberto & Chiappori, Pierre-André, 2025. "The Price of Breaking Up: Wage Shocks and Household Dissolution," IZA Discussion Papers 18152, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp18152
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    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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