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Endogenous divorce risk and investment

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Abstract

This paper addresses issues of divorce, consumption and investment. Divorce, in our model, is a forward put option on a non-traded variable, marital quality. We endogenise divorce so that the future decision that the couple makes will depend, inter alia, on current consumption, current wealth, investment outcomes and marital quality. We suggest a number of specifications for the bivariate utility of wealth and marital quality. We find that the mixex framework of Tsetlin and Winkler (Manag Sci 55:1942–1952, 2009) offers a useful combination of flexibility and tractability for our problem. Calibrations illustrating the usefulness of the model are provided.

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Notes

  1. Eeckhoudt and Schlesinger (2006) define ‘temperance’ as a preference for separation of two independent zero-mean background risks, rather than the bundling of both.

  2. Becker (1974, p. S23) notes “The incentive to separate is greater ... the more convinced a person becomes that the marriage was a ‘mistake.’ ... If the ‘mistake’ is considered large enough to outweigh the loss in marriage-specific capital, separation and perhaps divorce will follow.”

  3. See the paper https://www.census.gov/prod/2011pubs/p70-125.pdf.

  4. These authors note (pp 482) “In most populations the probability of divorce is low in the first years of marriage, then rises to a peak (the seven-year itch), then falls off.”

  5. The mean excess return of the S&P500 over the three-month T-bill rate for the period 1970-2014 was 6.79%, whilst the excess return over 10-year bonds was 3.94%. Corresponding standard deviations over this time period were 17.39% and 19.97%, respectively. Repeating calculations for the period 1992-2014 gives us mean excess returns of 8.18% and 4.29%, with standard deviations of 18.06% and 22.91%.

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Acknowledgements

The authors would like to thank the anonymous referees for helpful comments and suggestions.

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  1. University of Sydney, H69 Business School Building, Cnr Codrington and Rose Sts, Darlington, NSW, 2008, Australia

    Andrew Grant & Steve Satchell

  2. Department of Economics, Trinity College, University of Cambridge, Cambridge, UK

    Steve Satchell

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  1. Andrew Grant
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Correspondence to Andrew Grant.

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Grant, A., Satchell, S. Endogenous divorce risk and investment. J Popul Econ 32, 845–876 (2019). https://doi.org/10.1007/s00148-018-0719-7

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