An estimable game theoretic model of married women's labor force participation

Recently, much attention has been paid to both the rising divorce rates in this country and to women's increased participation in the labor force, but often as separate phenomena. This paper analyzes the labor supply decision of married women in the context of the uncertainty of divorce using a game theoretic model, estimation and simulation. The decisions of a married woman occur in the framework of a marriage in which she and her spouse accumulate physical and financial assets, human capital, and public goods (such as children). Upon the dissolution of the marriage, these assets are divided between husband and wife according to divorce law. While public goods cannot be appropriated and financial assets are easily transferred, human capital accumulation is personal and appropriable. This appropriability creates an incentive for each partner to insure against any negative outcomes associated with divorce by accumulating human capital and can thus result in the underprovision of public goods. While the “traditional” marriage of a fully employed husband and an unemployed wife may be a Pareto optimal solution in the certainty case (no divorce), a rising likelihood of divorce will put pressure on married women to participate in the labor force in an effort to insure against a future economic disaster. In the absence of a commitment mechanism, public goods such as time spent in home production are underprovided. A cooperative solution can overcome some of these inefficiencies, but it is limited by the ability to enforce a bargain in the divorce state as well as by the non-transferability of goods.; Central to the analysis is the role of divorce law and alimony structure in determining the framework under which couples make their labor supply decisions while married and the opportunities for efficiency gains through legal or other changes. This model adds to the strategic nature of the household interaction currently modeled by Nash Bargaining by incorporating a bargaining process of alternating offers with outside options which are affected by the past labor decisions of the couple. The finite horizon repeated bargaining process over the lifetime of the couple illuminates the hold-up problem when the wife's individually optimal decision to work (as a form of insurance against a negative outcome from divorce) is inconsistent with the efficient solution for the family as a whole, and the couple is unable to reach a mutually beneficial bargain. (Abstract shortened by UMI.)...