Simultaneity and selection in financial hardship and divorce
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Simultaneity and selection in financial hardship and divorce Scott Drewianka1 Martin E. Meder ●
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Received: 10 December 2019 / Accepted: 13 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract While the correlation between financial hardship and divorce is well-documented, the causality remains unclear: it is plausible that divorce causes hardship, that hardship encourages divorce, or that unobserved factors produce both outcomes. We specify a model that nests these possibilities and estimate it using the National Longitudinal Survey of Youth 1979. Structural estimates indicate divorce reduces the income/ needs ratio in women’s households by 0.35 standard deviations, though this is partially offset by apparent anticipatory labor supply responses. We also find a negative structural error correlation between divorce and income/needs ratios, but no evidence that a change in hardship causes divorce. Keywords Divorce Income Household Family ●
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JEL codes J12 D10 ●
1 Introduction The well-known positive correlation between divorce and financial hardship has long inspired debates over a variety of public policies. Many observers interpret that correlation as evidence that divorce causes hardship, such as if divorce eliminated opportunities to share household expenses or if divorcing spouses rushed to extract assets that were previously held jointly. Those who espouse this view often respond by proposing policies aimed either to reduce the incidence of divorce, to provide financial support to people impoverished by divorce, or perhaps to alter the financial settlements between divorcing spouses. On the other hand, some economic models suggest causality runs in
* Martin E. Meder [email protected] 1
Department of Economics, University of Wisconsin-Milwaukee, Milwaukee, WI, USA
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Department of Business Administration and Computer Information Systems, Nicholls State University, Thibodaux, LA, USA
S. Drewianka, M. E. Meder
the opposite direction, such as if unexpected losses of income reduced the potential gains from marriage, inflamed conflicts between spouses, or created incentives to separate in order to qualify for social welfare payments. For those mainly concerned about poverty, this view suggests there is little to be gained by promoting marriage, while those more concerned about reducing the divorce rate may seek to improve the finances of married couples or withhold financial assistance from divorced individuals. It is also quite possible the statistical relationship between hardship and divorce is spurious, such as if some personality traits (disagreeableness, irresponsibility, addiction, poor communication skills, etc.) increased the risk of both outcomes but there was no causal relationship between the two. Furthermore, it would not be surprising if the true statistical relationship between the two were confounded by some sort of anticipatory response, e.g., if some married workers increased their labor supply in order to boost their ability to sup
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