HOUSEHOLD FINANCES, INCOME SHOCKS, AND FAMILY SEPARATION IN BRITAIN

Sarah Bridges,Richard Disney

doi:10.1111/ecin.12259

Abstract

We examine the effect of household financial indebtedness on the incidence of partnership dissolution using a large survey of families with children in Britain. We use detailed data on household finances to provide a robust statistical analysis of the relationship between indebtedness and partnership dissolution and to avoid the potential simultaneity of financial and psychological health responses that arise when using self‐reported data on the extent of household “financial problems.” We examine whether the data provide any support for the “economic” models of divorce and separation developed by Gary Becker and his colleagues. (JEL J12, D12)

Highlights

This paper investigates the effect that financial stress, perhaps induced by adverse changes to the economic position of the household, has on the probability of partnership dissolution in Britain
Empirical studies report an association between financial strain and conflict and stress among couples which increases the likelihood of a relationship failing (Sullivan, Warren and Westbrook, 2000) few studies have looked at the impact household indebtedness has on partnership dissolution, let alone with recent data
Böheim and Ermisch (2001) show that those couples who experience an unexpected improvement in their financial situation are less likely to dissolve their partnership, while Fisher and Lyons (2006) focus on the relationship between bankruptcy and divorce.8. We address this gap in the literature, looking at the role that household indebtedness and arrears plays in partnership dissolution using data from the Families and Children Survey

Summary

Introduction

This paper investigates the effect that financial stress, perhaps induced by adverse changes to the economic position of the household, has on the probability of partnership dissolution in Britain. The FACS is a unique data set in Britain insofar as it contains precise indicators of household financial stress in addition to general changes in household economic circumstances The survey asks both qualitative and quantitative questions on financial hardship in each wave, together with questions on the extent and nature of credit and borrowing arrangements and measures of ‘over-indebtedness’. A reduction in the level of over-indebtedness and an increase in labour market participation increase the incidence of separation, along with the expected effect of adverse shocks or ‘stress’ variables such as worsening over-indebtedness Insofar as these changes are unanticipated by one or other partner, the results are consistent with Becker et al.’s (1977) model of partnership dissolution.

Background and Literature Review

The Families and Children Survey

Empirical Strategy

Household Finances and Partnership Dissolution

Sensitivity Analysis

Symmetry of Shocks and Plans for Dissolution

Conclusion