6.5  Family dissolution and reformation

The dissolution of marriage is consistent with the economic model of marriage. Just as people will prefer to marry if their utility from marriage is greater than their utility from remaining single, so a couple will stay married while the gains from marriage outweigh the gains from divorce.

The key source of change in the nature and role of marriage is, arguably, the increase in female labor force participation and human capital accumulation. As women’s labour market participation and human capital investment have risen, the gains from specialisation within a marriage have fallen. More similar market incomes between spouses reduce the gains from specialisation and hence from marriage. The higher the woman’s income is relative to the man, the greater the probability of divorce (Becker, Landes and Michael 1977). Furthermore, increases in a woman's income increase the opportunity costs of having children and caring for them at home. Therefore, a woman with a higher income is likely to have fewer children. The economic cost of divorce for a woman is lower the fewer the children and the higher her earning capacity.

Divorce behaviour reflects the thesis that a function of marriage is the protection of marriage-specific investments. The presence of children from the current marriage reduces the incidence of divorce for first and subsequent marriages, while the presence of children from former marriages increases it. Becker (Becker et al 1977) inferred that genetic children have a utility in their own right, while step-children have negative utility. Furthermore, divorce is less likely as the duration of the marriage increases and investments accumulate. Conversely, a higher expected probability of divorce reduces investment in specific capital and thereby raises the actual probability of divorce (Becker 1991).

Divorce behaviour also supports the thesis of assortative mating. Marriages are more likely to dissolve when realised earnings, health and fecundity exceed as well as fall short of expectations. Unexpected events mean that one party would now be able to match with a “better” person. Big differences in trait sorting (for example, intelligence, family background, religion, race) also increase the probability of divorce (Becker et al 1977).

6.5.1  Opportunity cost and “better offers”

Both parties suffer costs from divorce. These include loss of the benefits of marriage, direct financial costs, and transaction costs of finding another marriage partner. Until recently there were significant psychological and social costs to breaching the marriage contract due to its religious nature—with a decline in religious consciousness these informal enforcement mechanisms have declined in importance.

As noted earlier in the discussion of contracting to protect marital-specific investment, the costs of divorce are particularly high for women. Women remarry more slowly than men, partly because child custody reduces net resources and makes searching more difficult (Becker 1991). Women’s “capital value” on the marriage market depreciates faster over time than men’s, since women make their greatest investment earlier than men do (Cohen 1987).

However, the position of women is not as vulnerable as it was. With an increase in the earning power of women the costs to women of divorce have reduced. (Becker 1991) Higher earnings reduce the demand for children by increasing their opportunity cost. This allows for less marital-specific investment and more market participation. With less specialisation, some of the advantages of sexual division of labour, and hence the gains from marriage, are reduced. Further, as divorce has become more frequent, stigma has also reduced, further reducing the costs of divorce.

6.5.2  Incentives and the legal environment

The law and economics literature is, for obvious reasons, interested in the effect of family law on family behaviour. The presumption is that it has a significant effect, as individuals respond to incentives.

Under a system of dissolution by mutual consent, both parties would consent to a divorce if both expected to be better off divorced than married. According to the Coase theorem, the party keenest to end the contract would bribe the other until equilibrium was reached. With the move to “no fault” divorce law[11] divorce can occur if only one party expects to be better off. A number of commentators speculate about the effect that this change has had.

Becker argues that, in line with the Coase theorem, the primary change will be to the distribution of gains (since the departing party no longer has to bribe the other to obtain their consent) but not to the outcome (Becker 1991). However recent statistical work provides compelling evidence that in the case of North America the liberalisation of divorce law had a permanent impact on divorce rates (Allen 2002). In the case of Europe there is less evidence, and the statistical results are less clear-cut (Smith 2002).

Many have postulated that you would expect to see men instigating divorce more often (Brinig and Crafton 1994, Cohen 1987) since costs of divorce are greater for women and their greater investment in marriage-specific activities makes them vulnerable. However, US evidence shows that women file for divorce more than men, and that this has increased with the introduction of no-fault divorce. Further investigation reveals that filing corresponds closely with eventual child custody (Brinig and Allen 2000). This disjunction between theory and observation remains a puzzle and further work is required to understand what is going on. It appears, however, that both divorce law and custody law have a large impact on divorce behaviour.

Another factor raising scope for opportunism is asymmetric investment in income earning assets such as education. Often the principal asset is the husband’s earning capacity, to which the wife will have contributed by her labour in the household. “For example, a medical doctor or other professional has an incentive to leave after a spouse had financed a medical or professional degree if the local courts do not recognise the degree as marital property” (Allen and Brinig 1998: 10). Many US states treat the acquisition of a degree or earning capacity as a factor in awarding alimony precisely because this type of opportunism occurs. The “clean break” principle in New Zealand means alimony is uncommon, although recent legislation now allows for departure from a 50/50 division of marital assets.

In NZ the law regulates not only marriage, but also cohabitation. After three years of cohabitation couples acquire the legal status of marriage, following a modern legal trend of imposing rights and responsibilities on couples irrespective of their wishes. It may be the case that couples deliberately choose to cohabit because they do not want the legal commitments traditionally associated with marriage—in this case regulation of cohabitation amounts to compulsory marriage for people who would prefer not to be married (Dnes 2002).

6.6  Family pathology

Brinig and Crafton (1994) argue that the increase in spousal and child abuse is a consequence of the unenforceability of the marriage contract. In genuine contracts one would expect investments to be protected, dealings to be governed, and damages paid for breach of contract. The marriage contract, between approximately 1800 and the 1960s, used to have these characteristics—there was clear understanding of the terms of the contract and clear consequences for breach.

The introduction of no-fault divorce has rendered marriage an unenforceable and therefore illusory contract—parties can now terminate the contract at will and without penalties for breach. This has reduced the cost of opportunistic behaviour such as abuse—there is now no incentive other than moral obligation or feelings of affection to prevent post contractual opportunism by either party. This has resulted in fewer marriages, fewer children (less investment) and more opportunism (abuse), particularly of wives and children, since women lose more in divorce, so men have more bargaining power.

From this law and economics approach, the remedy would be legislative change to introduce incentives to abide in the marriage contract. Brinig and Crafton argue for reinstating damages for breach in awarding alimony (although not necessarily as grounds for divorce).

6.7  The changing family

The forces and incentives shaping the drive for family formation have changed over time, resulting in changes to family structure. In traditional societies characterised by uncertainty and limited information, the extended family or kin grouping was a source of insurance in the form of food, a source of valuable knowledge of older members, and a source of reputation as families were held accountable for their members. Becker argues that the market in modern societies now better handles many functions handled by families in traditional societies. “Kinship is less important in modern than traditional societies because market insurance is used instead of kin insurance, market schools instead of family schools, and examinations and contracts instead of family certification” (Becker 1991: 348).

Becker attributes the changes to the Western family after the Second World War to an increase in the earning power of women as Western economies developed. This led to an increase in labour force participation of women and raised the forgone value of time spent in childcare and other household activities. Higher relative price of children resulted in reduced demand for children and a drop in fertility. Higher female income and fewer dependent children reduced the gains from marriage for women and the advantages of sexual division of labour, leading to increases in the divorce rate.

6.8  Critiques

The rationality assumption of economics is the aspect of economics that has perhaps, been most subject to criticism. It is argued not only that this not a good description of human behaviour, but also that a world with only rational, selfish people would be a bad place to live. A response to this critique is that economics does not imply that all decisions of every individual are the result of cold calculation of advantage. Rather, rationality simply supposes that, in general, people will seek to act in ways that benefit them. Furthermore, the simple models and parsimonious assumptions of economics are not intended to fully describe the world but to capture the most powerful explanatory variables.

A further critique of economics is that it is imperialist—taking over the study of other disciples (Lazear 2000). While it is true that the economic way of thinking has increasingly been applied to non-traditional issue, the application of the rational choice paradigm has offered new insights in other disciplines.

One example of economic imperialism is Becker’s economic approach to the family involving maximising behaviour, household production and interdependent preferences. It is now widely accepted not only by economists but also by others who study the family. Subsequent writers have challenged aspects of his work, and some is still contested, but the discipline is still evolving.

Becker argues that a family can often maximize efficiency of labour by having the woman stay at home. Feminists have criticised Becker on this point, although he never advocates that women should stay home and make babies. Feminist critiques of Becker contend that the division of labour is determined not by comparative advantage, but is imposed by men and that discrimination forces female wages down, perpetuating female subordination at home and work.

6.9  The family, policy and the state

Marriage occurs in all societies. A wedding is typically a publicly acknowledged union, and is often accompanied by considerable ceremony and expenditure. Religious vows are often taken. Bride prices or dowries may be paid. All of these features of marriage can be viewed as mechanisms for ensuring that the spouses will fulfil the marriage contract. The public nature of marriage can also be seen as a mechanism for identifying the ancestry of and primary responsibility for children. Private arrangements for marriage pre-date the state and its role in regulating marriage and families by millennia.

The economic model addresses the way that people make decisions on selecting mates, forming families, having children and running households. The law and economics literature examines the rationale and effects of different norms, rules and laws about marriage and the family. An extension of these perspectives is the analysis of the rationale and effects of state intervention in family decisions.

Becker and Murphy (1988) argue that much state intervention can be seen as improving the efficiency of familial contracting. Many public actions achieve more efficient arrangements between parents and children by, for example, acting as proxies for children’s interests because children are incapable of acting for themselves. For example, the state provides education in part because even altruistic parents will under-invest in the human capital of their children, because children cannot commit to compensating their parents for their investment in the future.

The law and economics perspective emphasises the role of the state in enforcement of contracts. For example, there is an “efficient level of divorce”. The wrong set of divorce laws will lead to too many divorces, or too few for society’s perspective—they may induce divorce when parties might prefer to remain married, or prevent divorce when it would be in their mutual interests and conceivably that of the children. The legislative, and ideally socio-moral, environments should aim to prevent opportunistic appropriation of quasi rents, while allowing contract dissolution on a more equal basis (Cohen 1987).

The economic approach emphasises the substitution effects, incentive effects and unintended consequences of state intervention. Government policies may have little effect because they are neutralised by individuals’ responses (Pollak 2002: 39). For example, attempts to redistribute resources to handicapped children in poor families are often thwarted as parents compensate by spending more time and resources on their other children. As a result the target group receives only a fraction of the intended benefits.

The economic approach also focuses of the inter-relationship of interventions. One area of policy can affect family behaviour in other, unexpected ways. For example, laws about child custody are likely to significantly affect family dissolution behaviour, possibly more than laws directly regulating divorce.

A particular issue is how state intervention can lead to efficient and equitable outcomes. Overall, the literature is not optimistic about the ability of family law to provide a perfect legal framework. “Rather than the formal legal constraints, which prove to be tenuous and imperfect, it was the informal social and psychological constraints that by and large protected marriages” (Cohen 2002: 26).

The economic approach illustrates the economic realities behind the institutions of the family. It explains human behaviour not as the result of the cold, conscious calculation of costs and benefits, but as if people in general are aware of the tradeoffs that they face and respond to them in predictable ways. In other words, people make rational decisions in their family and personal lives, just as they do when buying goods and services in the market. The strength of the economic view of the family is that it highlights the fact that all policies have both benefits and costs, and that people will respond rationally to them. The question when considering policy is whether the benefits overall outweigh the costs and results in better outcomes than all other arrangements.