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




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

   Relationships of indefinite durationRelationships of indefiuration
                                    
      Business partnerships               E
                                          Long-term supply arrangements
      Employment relationships            M
                                          Marriages


   How to terminate a relationship? H
                                   
      Mutual consensus                 U
                                       Unilateral

                                                                           2
                                  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
                                                                                       3
                            *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




                                                             4
                                 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

   2x2 design: treatment variables are
        Separation rule
             Unilateral
             Mutual consensus
        Payoff structure
             Balanced
             Unbalanced

                                                              5
                                 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.

                                                                           6
                                  Design
   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.




                                                                                  7
                                  Design
   Mutual Agreement:
       The payment will be automatically transferred from one to another,
        the partnership will be started, continued, or terminated accordingly.

   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.


                                                                                   8
                   *Payoff Structure*
   Partnership deteriorates              Balanced (Unbalanced)
    (with exogenous probability 2/9)         Payoff Structure
         Stage 1 is better than Stage 2
         Stage 2 is better than Stage 3




                                                                  9
                   *Payoff Structure*
   Partnership deteriorates                  Balanced (Unbalanced)
    (with exogenous probability 2/9)             Payoff Structure
         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




                                                                  10
                     Payoff Structure
   Partnership deteriorates                       Balanced (Unbalanced)
    (with exogenous probability 2/9)                  Payoff Structure
         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                         11
           *Theoretical Predictions*
   When to marry and when to divorce?        Balanced (Unbalanced)
     Should enter marriage immediately          Payoff Structure
      after meeting a new counterpart.
     Should divorce at the end of stage 1.

   Exp. earnings per period
    (per subject): 12




                                                                  12
             *Theoretical Predictions*
   When to marry and when to divorce?            Balanced (Unbalanced)
      Should enter marriage immediately             Payoff Structure
       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

   Transfers from A to B
    (with equal split of the surplus)
      Unilateral/Balanced:       {3.6; 3.6; 0}
      Unilateral/Unbalanced: {3.6; 3.6; 0}




                                                                      13
             *Theoretical Predictions*
   When to marry and when to divorce?             Balanced (Unbalanced)
      Should enter marriage immediately              Payoff Structure
       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

   Transfers 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}


                                                                       14
               Theoretical Predictions
   When to marry and when to divorce?             Balanced (Unbalanced)
      Should enter marriage immediately              Payoff Structure
       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

   Transfers 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}

                                                                       15
                     Available Data
   12 sessions (3 per treatment)
   Each session lasted between 1.5 and 2 hours.
   Subjects earned on average $18.53.


        Treatment                      Subjects(Periods)
        Unilateral/Balanced          22(35); 24(28); 24(26)
        Consensus/Balanced           24(36); 24(33); 24(28)
        Unilateral/Unbalanced        24(49); 24(32); 24(38)
        Consensus/Unbalanced         26(35); 24(32); 24(41)




                                                              16
      *Result: Partnership Duration*
   Completed duration of partnerships, by treatment
                          Unilateral   Consensus       P-value
          Prediction        3.00         3.00
          Balanced          2.56         3.65           0.00
          Unbalanced        2.81         3.90           0.00
          P-value           0.73         0.24




                                                                 17
       Result: Partnership Duration
   Completed duration of partnerships, by treatment
                          Unilateral      Consensus               P-value
          Prediction        3.00                 3.00
          Balanced          2.56                 3.65              0.00
          Unbalanced        2.81                 3.90              0.00
          P-value           0.73                 0.24

   Percent of partnerships continuing: by law and stage
                          Single       Stage 1          Stage 2    Stage 3
         Prediction       100.00       100.00            0.00        0.00
         Unilateral       78.64         73.36            64.88      34.55
         Consensus        75.47         91.54            81.39      48.21
         P-value          0.0985       0.0000           0.0000      0.0456


                                                                             18
                           Result: Welfare
    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).

                          Balanced                      Unbalanced
                    Unilateral Consensus P-value   Unilateral Consensus P-value
    Both partners    19.85      20.58    0.0144      20.40      20.28   0.5948


    Type A           10.39      10.83    0.1262      11.04      12.22   0.0000
                       v          v                    v         v
    Type B            9.46       9.75    0.1396       9.36      8.06    0.0000
    P-value          0.0204     0.0017               0.0000    0.0000

                                                                                19
                          Result: Welfare
    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
                          Balanced                      Unbalanced
                    Unilateral Consensus P-value   Unilateral Consensus P-value
    Both partners    19.85    < 20.58    0.0144     20.40        20.28    0.5948


    Type A           10.39       10.83   0.1262     11.04    <   12.22    0.0000
    Type B            9.46       9.75    0.1396      9.36    >    8.06    0.0000
    P-value          0.0204     0.0017              0.0000       0.0000

                                                                               20
                  *Conclusion*
 Themutual consensus rule encourages continuation of
 partnerships (once they are formed.)

 Themutual consensus rule discourages the formation of
 partnerships under unbalanced payoff structure.




                                                          21
                     Conclusion
 Themutual consensus rule encourages continuation of
 partnerships (once they are formed.)

 Themutual 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.

                                                            22
                           Conclusion
 Inall 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.

                                                                          23

				
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