Untying the Knot: How Child Support and Alimony Affect Couples’ Decisions and Welfare

Hanno Foerster

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: In many countries divorce law mandates post-marital maintenance payments (child support and alimony) to insure the lower earner in married couples against financial losses upon divorce. This paper studies how maintenance payments affect couples’ intertemporal decisions and welfare. I develop a dynamic model of family labor supply, housework, savings and divorce and estimate it using Danish register and survey data. The model captures the policy trade off between providing insurance to the lower earner and enabling couples to specialize efficiently, on the one hand, and maintaining labor supply incentives for divorcees, on the other hand. I use the estimated model to study various counterfactual policy scenarios. I find that alimony payments come with strong labor supply disincentives and as a consequence fail to provide consumption insurance. The welfare maximizing policy involves increasing the lump sum component of child support, increasing the dependence of child support on the payer’s income and reducing alimony payments relative to the Danish status quo. Switching to the welfare maximizing policy makes women better and men worse off, but comparisons to first best allocations show that Pareto improvements are feasible, highlighting a limitation of child support and alimony policies.

Keywords: marriage and divorce; child support; alimony; household behavior; labor supply; limited commitment (search for similar items in EconPapers)
JEL-codes: D10 D91 J12 J18 J22 K36 (search for similar items in EconPapers)
Pages: 58
Date: 2020-04
New Economics Papers: this item is included in nep-law and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://www.crctr224.de/research/discussion-papers/archive/dp115

Related works:
Working Paper: Untying the Knot: How Child Support and Alimony Affect Couples’ Decisions and Welfare (2023)
Working Paper: Untying the Knot: How Child Support and Alimony Affect Couples' Decisions and Welfare (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2020_115v2

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