Prenuptial Contracts, Labor Supply and Household Investments

This paper examines prenuptial contracts that allow couples in Italy to choose, at virtually no cost, how their assets will be divided in case of divorce. Unique administrative data on marriages and divorces from 1995 to 2011 indicate that the majority of newlyweds (67% in 2011) choose to forgo the default community property regime and to maintain separate property, which in other countries would require signing a costly prenuptial contract. In addition, the data suggest that couples choose community property to provide insurance to wives who forgo labor market opportunities and undertake household-specific investments. We estimate a dynamic model of marriage, female labor supply, savings and divorce to match the patterns of regime choice and outcomes observed in the administrative data. The estimates suggest that, as the rate of female labor participation increases and the gender wage gap decreases, there are increasing gains from separate property. Hence, lower costs of prenuptial contracting, as occurs in Italy and other civil law countries, might lead to substantial welfare gains for both husbands and wives, greater rates of female labor participation, lower probability of divorce and higher rates of household savings.