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The Impact of Post-Marital Maintenance on Dynamic Decisions and Welfare of Couples

Hanno Foerster

No 982, Boston College Working Papers in Economics from Boston College Department of Economics

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 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 analyze counterfactual policy scenarios in which child support and alimony payments are changed. The welfare maximizing maintenance policy is to triple child support payments and reduce alimony by 12.5% relative to the Danish status quo. Switching to the welfare maximizing policy makes men worse off, but comparisons to a first best scenario reveal that Pareto improvements are feasible, highlighting the limitations of maintenance policies.

Keywords: marriage and divorce; child support; alimony; household behavior; labor supply; limited commitment (search for similar items in EconPapers)
JEL-codes: D10 D91 J18 J12 J22 K36 (search for similar items in EconPapers)
Date: 2019-09-13
New Economics Papers: this item is included in nep-lab
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