In dynamic family bargaining models, it is often assumed, for simplicity, that spouses have transferable utility as well as identical and constant marginal rates of intertemporal substitution. It has been argued that as long as spouses are at an interior solution, renegotiation does not hinder efficiency. We show that identical and constant marginal rates of intertemporal substitution (i.e., transferable utility across periods) are the source of this efficiency result. Even at an interior solution, renegotiation can cause inefficiency if marginal rates of intertemporal substitution are not constant. Our model is the first to both identify this source of inefficiency in a bargaining model in which the threatpoints of later periods are determined endogenously and demonstrate that there is no one-size-fits-all policy regulating divorce that can restore efficiency when couples are allowed to differ in their initial wage rates and/or preferences.
AlesinaA.IchinoA.KarabarbounisL. (2011). Gender-based taxation and the division of family chores. American Economic Journal: Economic Policy, 3(3), 1–40.
2.
AppsP. F.ReesR. (1999). On the taxation of trade within and between households. Journal of Public Economics, 73(2), 241–263.
3.
AuraS. (2003). Uncommitted couples: Some efficiency and policy implications of marital bargaining. Microeconomics 0304002, EconWPA. Missouri, US: Department of Economics, University of Missouri.
4.
AuraS. (2005). Does the balance of power within a family matter? The case of the Retirement Equity Act. Journal of Public Economics, 89(9–10), 1699–1717.
5.
BasuK. (2006). Gender and say: A model of household behaviour with endogenously determined balance of power. Economic Journal, 116(511), 558–580.
6.
BergstromT. C. (1989). A fresh look at the rotten kid theorem�and other household mysteries. Journal of Political Economy, 97(5), 1138–1159.
7.
BrowningM.ChiapporiP. A.WeissY. (2014). Family economics. Cambridge, UK: Cambridge University Press.
8.
ChiapporiP. A. (2010). Testable implications of transferable utility. Journal of Economic Theory, 145(3), 1302–1317.
9.
ChiapporiP. A.FortinB.LacroixG. (2002). Marriage market, divorce legislation, and household labour supply. Journal of Political Economy, 110(1), 37–72.
10.
ChiapporiP. A.IyigunM.WeissY. (2007). Public goods, transferable utility and divorce laws (IZA Discussion Paper No. 2646). Bonn, Germany: IZA Institute of Labour Economics.
11.
CignoA. (2012). Marriage as a commitment device. Review of Economics of the Household, 10(2), 193–213.
12.
EchevarriaC.MerloA. (1999). Gender differences in education in a dynamic household bargaining model. International Economic Review, 40(2), 265–286.
13.
FahnM.ReesR. (2014, March). Household relational contracts for marriage, fertility and divorce (Discussion Papers in Economics No. 20834). Munich, Germany: Department of Economics, University of Munich.
14.
GuglE.LerouxJ. (2011). Share the gain, share the pain? Almost transferable utility, changes in production possibilities, and bargaining solutions. Mathematical Social Sciences, 62(3), 133–143.
15.
GuglE.WellingL. (2012). Time with sons and daughters. Review of Economics of the Household, 10(2), 277–298.
16.
HyeeR.RobledoJ. R. (2009). Specialization in the bargaining family (Working Paper No. 640). London, UK: School of Economics and Finance, Queen Mary University of London.
17.
KemnitzA.ThumM. (2015). Gender power, fertility and family policy. The Scandinavian Journal of Economics, 117(1), 220–247.
18.
LundbergS. (2008). Gender and household decision-making. In F. Behio (Ed.), Frontiers in gender economics (pp. 116–134). London, UK New York, US: Routledge
19.
LundbergS.PollakR. A. (2003). Efficiency in marriage. Review of Economics of the Household, 1(3), 153–167.
20.
LundbergS. J.PollakR. A.WalesT. J. (1997). Do husbands and wives pool their resources? Evidence from the United Kingdom child benefit. Journal ofHumanResources, 32(3), 463–480.
21.
ManserM.BrownM. (1980). Marriage and household decision-making: A bargaining analysis. International Economic Review, 21(1), 31–44.
22.
MazzoccoM. (2007). Household intertemporal behaviour: A collective characterization and a test of commitment. The Review of Economic Studies, 74(3), 857–895.
23.
McElroyM. B.HorneyM. J. (1981). Nash-bargained household decisions: Toward a generalization of the theory of demand. International Economic Review, 22(2), 333–349.
24.
MeierV.RainerH. (2015). Pigou meets Ramsey: Gender-based taxation with noncooperative couples. European Economic Review, 77(C), 24–46.
25.
RainerH. (2007). Should we write prenuptial contracts? European Economic Review, 51(2), 337–363.
26.
WellsR.MaherM. (1996). Time and surplus allocation within marriage (Research Paper No. 1372). Stanford, US: Stanford University.
27.
WredeM. (2003). The income splitting method: Is it good for both marriage partners? German Economic Review, 4(2), 203–216.
