United but (un)equal: human capital, probability of divorce, and the marriage contract

This paper studies how the risk of divorce affects the human capital decisions
of a young couple. We consider a setting where complete specialization is
optimal with no divorce risk. Couples can self-insure through savings which offers
some protection to the uneducated spouse, but at the expense of a distortion. Alternatively,
for large divorce probabilities, symmetry in education, where both spouses
receive an equal amount of education, may be optimal. This eliminates the risk associated
with the lack of education, but reduces the efficiency of education choices.
We show that the symmetric allocation will become more attractive as the probability
of divorce increases, if risk aversion is high and/or labor supply elasticity is low.
However, it is only a “second-best” solution as insurance protection is achieved at the
expense of an efficiency loss. Finally, we study how the (economic) use of marriage
is affected by the possibility of divorce.