Untying the Knot: How Child Support and Alimony Affect Couples’ Dynamic Decisions and Welfare

Abstract

Abstract In many countries, divorce law mandates post-marital maintenance payments (child support and alimony) to insure the lower earner in married couples against financial losses upon divorce. This paper studies how maintenance payments affect couples’ intertemporal decisions and welfare. I develop a dynamic model of family labor supply, home production, savings, and divorce and estimate it using Danish register and survey data. The model captures the policy tradeoff between providing insurance to the lower earner and enabling couples to specialize efficiently, on the one hand, and maintaining labor supply incentives for divorcees, on the other hand. I use the estimated model to study various counterfactual policy scenarios. I find that alimony comes with more substantial labor supply disincentives compared to child support payments and is less efficient in providing consumption insurance. The welfare maximizing policy, within the status quo policy space, involves increasing child support and reducing alimony payments. My results show that Pareto improvements beyond this welfare maximizing policy are feasible, highlighting limitations of how child support and alimony policies are commonly implemented.