Marital instability and business start-up rates

Abstract

Inspired by the work of Becker, economists have produced a voluminous literature on divorce. This is almost completely devoid of any reference to macroeconomic effects. The bulk of it examines the determinants of separation. This paper explores one such macroeconomic effect; the impact of divorce on small business start-ups. The route through which it exerts this influence is the housing market. Housing is an important component of wealth for the majority of households. Divorce can have a dramatic impact on the value of investment in housing available to an individual (see Davis et al., 1992); for example, an individual may be nominally the owner of a house yet be forced, by the courts, to relinquish it for a former partner. This is a sharp change in wealth holdings which must surely influence major capital commitments. Given recent work on consumer durables and housing (Carruth and Henley, 1992) one might expect divorce to impact on durable spending, but this important aspect to aggregate demand has not been investigated. Nor has the influence on aggregate supply through its effect on the formation of new firms been examined. There is thus considerable scope for analysis of the impact of divorce on aggregate demand and supply. This paper focuses exclusively on the latter. It adapts some models from the emerging literature on the formation of new firms and applies these to data at county level for England and Wales. The estimated equations indicate that divorce has a negative and significant impact on the rate of small business start-ups.