Staying Together Forever? Life-cycle Effects of Overoptimistic Couples


In the United States, about 35 – 40% of all marriages end with a divorce. Yet, average probabilistic expectations of divorce are considerably lower, which is consistent with evidence regarding overoptimism in the psychology literature. In this paper, we incorporate overoptimistic expectations about divorce into a household life-cycle model with an endogenous accumulation of human capital and assets. We account for ex-ante heterogeneity in both spouses’ wages. Couples jointly choose their market hours, home production hours, and joint savings. We quantify the model using data from the US and show that overoptimism about marital stability leads to (1) higher within-couple specialization and (2) lower savings because overoptimistic couples do not anticipate the insurance value of human capital and assets in case of divorce. The higher specialization of overoptimistic couples is driven by reduced market hours of the lower-wage spouse, which contributes to lower human capital accumulation, thereby exacerbating within-couple wage inequality. Overoptimism during marriage propagates beyond divorce through assets and human capital, which is particularly harmful to the less-insured, lower-wage spouse. The initially higher-wage spouse potentially benefits from over-optimism. In contrast, the lower-wage spouse loses outweighing the partner’s gains. If all couples acted under rational expectations, the aggregate levels of hours worked, human capital, and assets in the economy would increase substantially. Finally, a divorce fund that reallocates resources from married couples to divorcees leads to ex-ante welfare increases except for rational men.

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