The Price of Breaking Up: Wage Shocks and Household Dissolution

Jorge Velilla (), José Alberto Molina and Pierre-André Chiappori ()
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Jorge Velilla: University of Zaragoza
Pierre-André Chiappori: Columbia University

No 18152, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: wages; divorce; commitment; collective model; PSID data (search for similar items in EconPapers)
JEL-codes: D12 D13 J12 J31 (search for similar items in EconPapers)
Date: 2025-10
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