Household Behavior and Optimal Property Division upon Divorce

Sarolta Laczó () and Arpad Abraham ()

No 1041, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: The objective of this paper is to study the optimal property division upon divorce in a framework where spouses share risk subject to limited commitment. First, we consider a simple model, where marriage is beneficial for two reasons: (i) it provides (partial) insurance against individual income shocks, and (ii) spouses may enjoy direct individual benefits from the match, `love,' which is stochastic, as in Voena (AER, forthcoming). We highlight analytically that the optimal property division rule is subject to a trade-off between intra-household risk sharing and insurance across marital statuses. Allocating less household assets to the party filing for divorce improves risk sharing while married, but worsens consumption smoothing for divorcees. Second, we turn to a quantitative/empirical exercise, where the key parameters are estimated using panel data from the United Kingdom. Then the optimal policy, as well as counterfactuals are computed.

Date: 2015
New Economics Papers: this item is included in nep-dge
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