Dissertation

Optimal divorce cost: a commitment device at the end but a barrier at the beginning

Divorce cost comes as a double-edged sword with respect to investment: a high divorce cost retains relationship-specific investments. However, too high a divorce cost hinders entry into marriage at the first step, as people are still risk-averse and would like to avoid the bad love shock. Similarly, a low divorce cost lower the exit barrier of marriage, which may increase divorce and the accompanied investment loss. Conversely, a low divorce cost may also encourage marriage strategic investment in marriage-specific capital to partially offset the incomplete enforcement of marriage contracts.

Therefore, upper and lower bounds indicate the possibility of an optimal divorce cost for the state with the purpose of maximizing marriage-specific total investment, and an optimal divorce cost for the individual to make a commitment while attaining flexibility.

Divorce cost affects the incentive to invest in marriage-specific capital for several reasons. First, low divorce cost lower the exit barrier, reducing the incentive to invest. Once a marriage-specific investment has matured, the returns are pure rents, and hence the incentive to invest jointly may depend upon the ability of the couple to commit to a specific distribution of future rents. Lower divorce, as a weak commitment, may not hinder either spouse to leave the investment and hence, decreases incentive to invest jointly. On the other hand, the higher the divorce cost is, the more unlikely married people divorce and withdraw investment. Secondly, low divorce cost encourages marriage-specific investment by encouraging people to get into marriages. Hence, high quality match spouses are unable to distinguish themselves from low quality match who also enter marriage, leading to the third reason. Couples may use investment in marriage-specific capital strategically: overinvesting today to constrain their future selves to prefer to remain married than to divorce.

Divorce cost functions with temptations and risks when either spouse has the incentive to turn to external temptation or withdraw the investment. The cost encourages relationship-specific investment by decreasing payoff from outside options and ensuring spouses to prefer staying in the relationship comparing to exiting, ensuring a framework to contract over long-term investments.

Hypothesis: High divorce cost increases the desire of asymmetric, intertemporal investments. Low divorce cost increases the desire of symmetric, short-term investments (to the extent that couples may attempt to precommit to not divorcing)