Thursday, March 17, 2011

Rent seeking in divorce

Divorce is breaking a marriage, and courts rule on the compensation of the involved parties. In countries where no-fault divorce is allowed, how compensation is allocated is very much dependent on the outside option of each party, particularly when negotiations happen without the involvement of a judge, who is then just a threat point. For example, when there is only consensual divorce allowed, the partner not seeking divorce has all the bargaining power. But when no-fault unilateral divorce is allowed, the roles are completely reversed.

Sietse Bracke, Koen Schoors and Gerd Verschelden study how the introduction of unilateral divorce changes outcomes in Belgium, where consensual divorce was already permitted. In particular they look at self-sacrifice, for example how some household member may specialize in home production and thus jeopardize her labor market potential and bargaining position in case of divorce, especially when there is no-fault unilateral divorce. Indeed, one can view this specialization as an investment in future rents from marriage, and divorce annihilates those.

To analyze this, the authors collected survey data from divorces in four cities for a year. Using alimony as a signal of bargaining power, they find that alimonies are higher or more likely for long marriages, for no-fault divorces, and when there is significant self-sacrifice. That would all be consistent by theory, but unfortunately these results are somewhat tainted by the fact that the law gives judges very similar directives for handling divorces outcomes.

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