Subjective Divorce Risk, Perceived Outside Options, and Intra-Household Allocation

Divorce is usually studied as an ex-post outcome of household decisions. We study whether the perceived risk of divorce shapes behaviour within marriage before separation occurs. Using new survey data from couples, we elicit individuals’ subjective probability of divorce, their beliefs about how divorce would affect future outcomes, and their allocation choices under different counterfactual scenarios. The results show substantial heterogeneity in perceived divorce risk and suggest that these beliefs are economically meaningful. Women expect divorce to substantially increase their future labour force attachment, while men anticipate little adjustment in labour supply. Both men and women expect divorce to reduce their fertility and life expectancy. Individuals who perceive a higher risk of divorce allocate resources more privately, and expect different labour supply and retirement age. We then develop a model of household decision-making with limited commitment and endogenous divorce risk. In the model, the possibility of separation shapes current allocations, consistent with what we see in the data.