Hanno Foerster (Mannheim)

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 wel- fare. I develop a dynamic model of family labor supply, housework, savings and divorce and estimate it using Danish register data. The model captures the policy trade off between provid- ing 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 analyze counterfactual policy scenarios in which child support and alimony payments are changed. The welfare maximizing maintenance policy is to triple child support payments and reduce alimony by 12.5% relative to the Danish status quo. Switching to the welfare max- imizing policy makes men worse off, but comparisons to a first best scenario reveal that Pareto improvements are feasible, highlighting the limitations of maintenance policies.