Filip Vesely, Vivian Lei, and Scott Drewianka

1
An Experimental Studyof Commitment under
Different Separation Rules

• Filip Vesely, Vivian Lei, and Scott Drewianka

2
An Experimental Studyof Commitment under
Different Separation Rules

• Filip Vesely, Vivian Lei, and Scott Drewianka

• Relationships of indefiuration
• E
• M
• H
• U

• Relationships of indefinite duration
• Business partnerships Long-term supply
  arrangements
• Employment relationships Marriages
• How to terminate a relationship?
• Mutual consensus Unilateral

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
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

5
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

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.

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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.

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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.

9
Payoff Structure

• 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
10
Payoff Structure

• 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
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Payoff Structure

• 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
12
Theoretical Predictions

• When to marry and when to divorce?
• Should enter marriage immediatelyafter meeting a
  new counterpart.
• Should divorce at the end of stage 1.
• Exp. earnings per period (per subject) 12

Balanced (Unbalanced)Payoff Structure
13
Theoretical Predictions

• When to marry and when to divorce?
• Should enter marriage immediatelyafter 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

Balanced (Unbalanced)Payoff Structure
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Theoretical Predictions

• When to marry and when to divorce?
• Should enter marriage immediatelyafter 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

Balanced (Unbalanced)Payoff Structure
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Theoretical Predictions

• When to marry and when to divorce?
• Should enter marriage immediatelyafter 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

Balanced (Unbalanced)Payoff Structure
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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)
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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
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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
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Result Welfare

• In terms of the average period earnings
• The difference between Type As and Type Bs
  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).

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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 As earnings
  are larger under the consensus divorce law Type
  Bs earnings are larger under the unilateral
  divorce law

lt
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Conclusion

• 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.

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Conclusion

• 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.

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Conclusion

• 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.