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Should We Write Prenuptial Contracts?

  • Helmut Rainer

When a marriage dissolves, a couple usually divides all marital assets according to the division rule imposed upon them by the state. The present paper uses incomplete contract theory to study the interplay between the state�s division rule and a married couple�s investment in relationship-specific assets. The inability of spouses to contract upon their specific investments, leads them to choose less than the first-best level of investment. To the extent that this underinvestment poses a threat to the stability of marriage, this creates a role for the use of ex ante separation agreements that stipulate the allocation of marital assets upon divorce. We examine the type of contractual structure that the partners should optimally adopt at the outset of marriage. The implications of our results are then applied in the context of various asset division rules discussed by policy makers.

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Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200514.

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Date of creation: 15 Dec 2005
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Handle: RePEc:san:wpecon:0514
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