Setting the Dowry Optimally to Extract the Full Surplus: A Contract Theory Perspective

Abstract

In this note, we study the contractual interaction between the fathers of a prospective groom and a prospective bride in a traditional society. Based on his valuation of the groom, the bride’s father approaches the groom’s father with an offer of marriage. The groom’s father does not know the quality of the bride. Even so, he holds superior bargaining power. He uses this power to select the dowry optimally and this selection leads to a marriage between his son and the bride. We use a simple model and show that if the bride’s father’s risk aversion increases in his valuation of the groom then despite being asymmetrically informed, the groom’s father can implement the first-best dowry contract and extract all the surplus from the bride’s father.