How do we understand the marriage contract from an economic standpoint? Just as value is created, divided, and exchanged in the labor market, so it is on the marriage market. Last week’s WAPPP seminar featured Corinne Low, Assistant Professor of Business Economics and Public Policy at the Wharton School at the University of Pennsylvania, as she described the results of her study on marriage and homeownership as a lens into understanding what is valuable about the marriage contract, who reaps value from the marriage contract, and as policies change, how that value is changing over time.
While marriage was previously the universally adopted or aspired to family arrangement, this is no longer the case. There has been a recent increase in cohabitation and nonmarital fertility. However, this change does not necessarily mean that tastes or social values have changed; rather, Professor Low wonders, what in the marriage equation has changed to make people optimize their preferences differently? How has this changed been applied throughout society, where we see a tremendous amount of stratification in rates of marriage based on income, level of education, and race?
The key question in this line of inquiry is what made marriage valuable in the first place, and what made it retain value for some populations and lose value for others?
The marriage contract and nonmarital cohabitation have converged in recent years: the security of marriage has decreased with the advent of unilateral divorce, whereas nonmarital relationships have become more secure with the enforcement of paternity rights and responsibilities outside of marriage. However, there remains one key difference: only in marriage are assets divided up upon divorce. If one person in a cohabitating couple is making all of the mortgage payments, if that relationship breaks up, the other gets nothing. However, in a marriage contract that asset is divided or, very often, assigned to the mother (throughout the presentation, Professor Low referred to this effect in terms of husbands and wives; while this is not universally true, it is disproportionately the case and was used illustratively).
There is, therefore, an important distinction between income, which will be divided in both marital and nonmarital relationships in the form of child support, and asset-sharing, which is unique to the marriage contract.
Home-purchasing, according to Professor Low, may be an important way for husbands to commit to their wives. Because she will be guaranteed at least a share of that valuable asset if the relationship goes south, in her economic calculus it makes sense to invest in the human capital of the children, even if it reduces her own income. Similarly, because the house is at risk, it disincentivizes the husband from unilaterally seeking a divorce. “Betting the House” may be a way of securing the marriage contract.
Investing in children has a cost – if a parent spends time investing in children, they have less time to invest in their own human capital. Generally mothers are the ones making these large investments – women tend to experience a decline in wages after having children, and economically speaking it makes sense for the lower-income partner to invest in children. While marriage used to provide some security for these investments, the marriage contract got more precarious as divorce became easier and more common. However, high-asset individuals can still offer some of this insurance, because those assets will be divided and can provide security for child human capital investments. As such, marriage is really only useful for people who have assets: the decision has less to do with a desire to invest in child human capital than with an ability to secure that investment with assets that can back the marriage contract.
Now that paternity rights and responsibilities are enforced outside of marriage, nonmarital relationships are just as good as marital relationships for individuals without the assets to buy a house – only those with assets get the extra security for their marriage contract. As such, people without assets will flee from marriage, and those with assets will continue to get married. Professor Low and her colleagues set up a model in which nonmarital couples, upon splitting up, would either receive no asset transfer, 1/3 of what the asset transfer in a marital relationship would be, or 2/3 of the marital relationship asset transfer. Under each of these conditions, how do individuals’ preferences change with respect to marital and nonmarital relationships? With no nonmarital transfer, people without assets are divided between marital and nonmarital relationships. At the 1/3 transfer level, people without assets significantly increase their nonmarital fertility. At the 2/3 level, still less than what a spouse would get if a marriage split up, people without assets entirely abandon marriage. At each stage, people with assets choose marriage.
This hypothetical bears out in the data: looking at a longitudinal data set of marriages and average home prices in the year of marriage, those who got married in an era of high housing prices were less able to purchase a home when they got married, and therefore they were less able to secure their child human capital investment. While there are certainly other explanations available, couples facing high housing prices at the time of their marriage tend to have fewer children, and their children are more likely to be held back in school. Assets provide commitment value that allows for greater specialization in the home and more optimal investments in children, which makes the marriage contract more valuable.
This data demonstrates that legal changes (unilateral divorce and paternity acknowledgement) and concordant economic change can be responsible for stratification in marital decisions, rather than “tastes” or preferences. This finding has significant implications for policymakers, as the racial gap in assets and homeownership is much larger than the racial gap in income, in part because of redlining and mortgage discrimination practices. The gap in marriage among racial groups that has been attributed to tastes or values can actually be attributed to homeownership or the ability to get a mortgage. If we take marriage seriously as an economic contract, it is evident that policies that change the contracting environment have deep implications. This model provides a contracting explanation for why marriage might lead to greater child investment, without relying on arguments about preferences.
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