Divorce and Savings

This paper examines the pattern of consumption and savings when heterogeneous agents enter into marriage and have the option of dissolving the marriage if there exists no set of consumption allocations that can preserve the union. The research presents an analysis of this scenario using dynamic cooperative bargaining models of household decision making with a divorce threat point. The model will be used to examine the behavior of household savings when divorce is a possibility and may help to explain the rapid decline in household saving during the 1980s. Most existing bargaining models of household spending decisions are static and, therefore, unable to analyze the savings decision. In this paper the evolution of household savings depends upon both partners' consumption decisions as well as the income paths of each partner. If cooperation breaks down (if the value of dissolution exceeds any cooperative strategy), the couple divorces and household savings is split according to some rule between the partners. The dynamic nature of the model will allow an investigation of the path of savings in households that do not divorce relative to households that do. Since the value of the threat point changes over time as assets accumulate, both the probability of divorce and household saving will change endogenously over the lifetime of the household. This is true even when the value of other opportunities outside the marriage are constant. Of course, as the value of opportunities outside the marriage change, each partnerÍs incentive to contribute to savings changes.