1 Filip Vesely, Vivian Lei, and Scott Drewianka * An Experimental Study of Commitment under Different Separation Rules

2 Filip Vesely, Vivian Lei, and Scott Drewianka An Experimental Study of Commitment under Different Separation Rules Relationships of indefiuration  E  M H  U Relationships of indefinite duration  Business partnershipsLong-term supply arrangements  Employment relationships Marriages How to terminate a relationship?  Mutual consensusUnilateral

3 Motivation  Studies agree on the effect of separation rules on the division of assets after separation, but disagree on their effect on the likelihood that the match will continue. The Coase Theorem  The change in divorce laws is viewed as a shift in property rights and thus should have no effect on commitment decisions: Becker (1981) The Coase Theorem is not applicable if unilateral divorce laws  reduce the cost of separating: Peters (1992)  reduce trust and thus benefits: Allen (1992)  reduce the benefits of ‘insurance’: Grossbard-Shechman et al. (2002)  Empirical evidence on both sides  Impact of separation rules on formation of matches is ambiguous

4 To study the impact of separation rules on  incentives to form partnerships in the first place  the likelihood that partnerships dissolve (and thus the match duration)  the relative well-being of two partners *Objective*

5 2x2 design: treatment variables are  Separation rule Unilateral Mutual consensus  Payoff structure Balanced Unbalanced Objective To study the impact of separation rules on  incentives to form partnerships in the first place  the likelihood that partnerships dissolve (and thus the match duration)  the relative well-being of two partners

6 Design Two types of subjects (A & B) are are randomly paired with each other. Task:  Their task in period 1 (also every time when they are matched with new counterparts in later periods) is to decide if they want to enter a partnership starting from next period.  Once a partnership is formed, the task in each period is to decide if they want to stay together with the same partner for at least one more period. Random ending rule:  there is a fixed 10% chance each period that an individual marriage will be terminated exogenously, regardless of the result of the negotiation.

7 Entering, continuing and terminating a partnership can be facilitated by negotiable transfer payments.  Either party can offer/request some payment to/from his/her counterpart.  Negotiation phase lasts one minute. Design

8 No Mutual Agreement:  The “unattached” (singles) will be matched with new counterparts next period.  The “attached” under unilateral divorce law Pay penalty (2 francs) and be matched with new counterparts next period.  The “attached” under mutual consensus divorce law: Pay penalty (2 francs) but stay with the same counterpart again for the following period. Design Mutual Agreement:  The payment will be automatically transferred from one to another, the partnership will be started, continued, or terminated accordingly.

9 Partnership deteriorates (with exogenous probability 2/9) Stage 1 is better than Stage 2 Stage 2 is better than Stage 3 Balanced (Unbalanced) Payoff Structure *Payoff Structure*

10 Partnership deteriorates (with exogenous probability 2/9) Stage 1 is better than Stage 2 Stage 2 is better than Stage 3 Benefits from marriage Stage 1 is better than being Single Benefits from divorce Stage 3 is worse than being Single Balanced (Unbalanced) Payoff Structure *Payoff Structure*

11 Partnership deteriorates (with exogenous probability 2/9) Stage 1 is better than Stage 2 Stage 2 is better than Stage 3 Benefits from marriage Stage 1 is better than being Single Benefits from divorce Stage 3 is worse than being Single Stage 2: - is better than being Single, but - is worse than divorce followed by a new partnership - only one of the two partners – A (B) – prefers a divorce w/o compensation Balanced (Unbalanced) Payoff Structure Payoff Structure

12 When to marry and when to divorce?  Should enter marriage immediately after meeting a new counterpart.  Should divorce at the end of stage 1. Exp. earnings per period (per subject): 12 Balanced (Unbalanced) Payoff Structure *Theoretical Predictions*

13 When to marry and when to divorce?  Should enter marriage immediately after meeting a new counterpart.  Should divorce at the end of stage 1. Exp. earnings per period (per subject): 12  With equal split of the surplus earnings are same for both A & B Transfe rs from A to B (with equal split of the surplus)  Unilateral/Balanced: {3.6; 3.6; 0}  Unilateral/Unbalanced: {3.6; 3.6; 0} Balanced (Unbalanced) Payoff Structure *Theoretical Predictions*

14 When to marry and when to divorce?  Should enter marriage immediately after meeting a new counterpart.  Should divorce at the end of stage 1. Exp. earnings per period (per subject): 12  With equal split of the surplus earnings are same for both A & B Transfe rs from A to B (with equal split of the surplus)  Unilateral/Balanced: {3.6; 3.6; 0}  Unilateral/Unbalanced: {3.6; 3.6; 0}  Consensus/Balanced: { 0 ; 0 ; 18} Balanced (Unbalanced) Payoff Structure *Theoretical Predictions*

15 When to marry and when to divorce?  Should enter marriage immediately after meeting a new counterpart.  Should divorce at the end of stage 1. Exp. earnings per period (per subject): 12  With equal split of the surplus earnings are same for both A & B Transfe rs from A to B (with equal split of the surplus)  Unilateral/Balanced: {3.6; 3.6; 0}  Unilateral/Unbalanced: {3.6; 3.6; 0}  Consensus/Balanced: { 0 ; 0 ; 18}  Consensus/Unbalanced: {24; 0 ;–18} Balanced (Unbalanced) Payoff Structure Theoretical Predictions

16 Available Data 12 sessions (3 per treatment) Each session lasted between 1.5 and 2 hours. Subjects earned on average $ TreatmentSubjects(Periods) Unilateral/Balanced22(35); 24(28); 24(26) Consensus/Balanced24(36); 24(33); 24(28) Unilateral/Unbalanced24(49); 24(32); 24(38) Consensus/Unbalanced26(35); 24(32); 24(41)

17 *Result: Partnership Duration* Completed duration of partnerships, by treatment UnilateralConsensusP-value Prediction3.00 Balanced Unbalanced P-value

18 Result: Partnership Duration Percent of partnerships continuing: by law and stage SingleStage 1Stage 2Stage 3 Prediction Unilateral Consensus P-value Completed duration of partnerships, by treatment UnilateralConsensusP-value Prediction3.00 Balanced Unbalanced P-value

19 In terms of the average period earnings:  The difference between Type A’s and Type B’s period earnings is always significant.  A person who “brings less” to the marriage, especially in its early stage (Type B), earns significantly less than his advantaged counterpart (Type A). Result: Welfare v v v v

20 In terms of the average period earnings:  Balanced payoff structure: Total earnings are larger under the consensus divorce law  Unbalanced payoff structure: Type A’s earnings are larger under the consensus divorce law Type B’s earnings are larger under the unilateral divorce law Result: Welfare < > <

21  The mutual consensus rule encourages continuation of partnerships (once they are formed.)  The mutual consensus rule discourages the formation of partnerships under unbalanced payoff structure. *Conclusion*

22  The mutual consensus rule encourages continuation of partnerships (once they are formed.)  The mutual consensus rule discourages the formation of partnerships under unbalanced payoff structure.  The total amount of transfers from one party to another is lower than predicted in all four treatments.  The transfer payments vary with the separation rules significantly less then predicted. Conclusion

23  In all treatments, the less advantaged partners are significantly worse off than their counterparts.  The mutual consensus law does not help to provide insurance to the less advantaged partners. Not consistent with the common notion that mutual consensus law would be able to provide weaker parties more security in relationships. Consistent with the finding by Stevenson and Wolfers (2003) that unilateral divorce laws improve the welfare of the more vulnerable party.  In balanced payoff structure the total payoff is larger under mutual consensus law. Conclusion