The Value of Commitment: Marriage Choice in the Presence of Costly Divorce

Two individuals may choose to enter a coresidential relationship, which may or may not include joint property ownership and raising children. In addition to that, individuals may decide to formalize this contractual relationship by holding a marriage ceremony. The literature on coresidential relationships typically assumes that the formal marriage contract offers additional tangible benefits to the couple. However, this assumption is not obvious, and these potential benefits (or costs) may vary greatly across societies and time. What remains invariant, however, is the typically higher costs of terminating a relationship that has been “sealed” by marriage. The goal of this paper is to develop a simple dynamic model that can explain the existence of marriage contract. The model assumes that the only difference between marriage and non-marital cohabitation is the higher contract termination cost associated with marriage, and that the agents are free to enter either type of relationship contract. The quality of the match evolves randomly and independently over time, and every period each of the paired agents makes his or her decision on whether to stay in the given relationship or terminate it and seek another one based on the current match quality and expectations about the future. The relationship survives only if both agents choose to not terminate it. The unilateral decision to end a relationship by one agent may impose a negative externality on her partner, if he still would prefer to maintain it. The main finding is that when break-up costs are sufficiently high, choosing a marriage contract that provides even higher termination cost may reduce the expected break-up externality and result in greater welfare