Relational contracts for household formation fert

Authors: Matthias Fahn Ray Rees Amelie Wuppermann

Publish Date: 2015/12/16

Volume: 29, Issue: 2, Pages: 421-455

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Abstract

This paper applies the theory of relational contracts to a model in which a couple decides upon fertility and subsequently on continuation of the relationship We formalize the idea that withinhouseholdcooperation can be supported by selfinterest Since the costs of raising children—a household public good—are unequally distributed between partners a conflict between individually optimal and efficient decisions exists Sidepayments can support cooperation but are not legally enforceable and thus have to be part of an equilibrium This requires stable relationships and credible punishment threatsWithin this framework we analyze the effects of separation costs and postseparation alimony payments on couples’ fertility decisions We derive the predictions that higher separation costs and higher alimony payments facilitate cooperation and hence increase fertility We present empirical evidence based on a recent German reform that reduced rights to postdivorce alimony payments We find that this reform reduced inwedlock fertilityWe thank the editor Alessandro Cigno and two anonymous referees for many helpful comments and suggestions Furthermore we thank Patricia Apps Asnia Asim Niko Matouschek and participants at seminars at the University of Munich and Stockholm the 2009 Annual Conference of the European Association of Law and Economics Rome the 2009 Conference of the German Economics Association Magdeburg the 2010 Meeting of the American Law and Economics Association Princeton the 2010 Workshop on Economics of the Family ANU Canberra the 2011 CESifo Conference on Applied Microeconomics Munich and the 2011 Conference on the Economics of the Family Paris for many helpful comments on earlier versions of this paper AnnaCatharina Wedde provided excellent research assistance Remaining errors are our own Matthias Fahn gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft through GRK 801Assume players can sign a contract at the beginning of period t=1 with courtenforceable discretionary transfers and player 1 getting a share α∈0 1 of the resulting net surplus Such a contract will yield the efficient outcome ie n ∗ =n FB and the couple separates if and only if vhat vWe have to show that transfers exist that make both partners agree to the contract with the alternative being the noncooperative outcome and that make both partners agree to the efficient outcome There we assume that p 1 is solely used to redistribute gains from a higher fertility and p 2 is solely used to eventually keep the relationship together ie p 1n and p 2v 1v 2 This assumption can be made without loss of generality since efficient as well as noncooperative fertility levels are independent of all secondperiod eventsFirst we analyze period 1 ie the couple’s fertility choice There assume the following contract The couple agrees on a fertility level n ∗ = n F B If n F B is actually chosen the payment p 10 where the actual value is determined below is made from primary to second earner For any other realized fertility level no payment is made This implies that if a deviation occurs the second earner will only agree on the noncooperative level underline n

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