The diversity of coverage instruments for private risk

18The majority of industrialized countries have a legal form of risk coverage for divorce, known variously as alimony, maintenance or spousal support. Awarded to spouses whose standard of living has been compromised, alimony takes the shape of a private transfer from the wealthier to the less wealthy spouse. For the latter, it constitutes a form of ex post coverage (after the damage occurs) of divorce risk.

19From the standpoint of economic analysis, such a transfer is justified by a criterion of effectiveness, as alimony encourages spouses to specialize in optimal sharing of tasks by ensuring that the spouse who invests in the family receives compensation for that investment in the event of a separation. In the founding model of the economic analysis of alimony, Landes (1978) shows that its role is to compensate the wife for the opportunity costs incurred when marrying (notably giving up on her own career), and that by doing so it enables the spouses to attain optimal output by encouraging each of them to specialize in the task in which they are the most productive. To justify alimony, Cohen (1987) insists on the specific – and thus hard to redeploy – nature of these domestic investments, which, in the event of divorce, cannot be recouped by the person who made them. The specific investments approach, inspired by the economic analysis of contracts, can be used to specify the nature of the loss to be offset. According to the typology proposed by Shavell (1980) to characterize the various types of loss resulting from breaches of contract, alimony may be considered, as did Bolin (1994), as a means to cover three types of loss. The first is the loss resulting from having furthered the career of one’s spouse without receiving any gains from that career owing to the separation. In this case, alimony ensures that in the event of separation, the wife is rewarded for her investment in her husband’s professional advancement. To calculate the loss to be offset, we must consider the husband as if he had never been married and determine the value of the additional human capital obtained through the marriage. The second type of loss may correspond to one or other spouse giving up their professional career to make a greater investment in their family. To determine the value of the loss to be offset, the “wronged” spouse has to be considered in terms of the situation they would have been in had they not married, and the present value of the income shortfall from not having had a full-time and continuous professional career must be calculated. The third type of loss may include all the material and affective losses stemming from the divorce. Here, the value of the loss is calculated in terms of the post-divorce decrease in well-being. Calculating the loss involves considering what the spouse’s situation would have been if he or she had remained married. It should be noted that, from an economic standpoint, nothing justifies treating the consequences of separation differently for different types of union. But in France, alimony exists under law for married couples only.

20Alongside alimony, ex ante instruments (before the risk is realized) are, or may be, used by the partners to protect themselves against the economic costs of divorce.

21A basic form of ex ante coverage consists in both spouses building up precautionary savings or limiting their specific investments in domestic life and having a professional activity throughout the marriage, the risk being, under the economic approach of alimony, that the couple’s output is not maximized.

22The spouses may also seek to self-insure against divorce risk by signing a marriage contract that allows them to anticipate ex ante the economic consequences of a divorce. The marriage contract is analysed by economists in the same way as alimony. Based on contract economics and on a vision of marriage as enabling specific investments aimed at optimal domestic output, the contract is seen as a tool that also serves, by securing specific investments, to maximize marriage gains (Cigno, 1991). More specifically, by providing for marriage assets to be shared in a way that favours the partner who makes the specific investment, the contract creates “positive” incentives. The question here is to identify the optimal rule for sharing out the couple’s assets at the moment of the divorce, i.e. a distribution that will generate the best incentives for investing in the marriage and, by doing so, maximize the gains (Rainer, 2007). Economists stress the potential advantages of prenuptial contracts over alimony or the rules set out in statutory property regimes, insisting on the efficacy of giving contractual autonomy to the spouses (Smith, 2003).

23A third form of the ex ante coverage of divorce risk could be envisaged in which the spouses transfer the coverage to a third party, providing that the conditions applicable to private insurance are fulfilled. [9] Households could take out an insurance policy at the start of the marriage to guarantee compensation for the spouse most financially disadvantaged by the separation. The amount of the premium would be proportional to the value of the potential loss for the spouse in question and could be reassessed in line with the professional and family choices made by the household throughout the marriage. [10] Each spouse could also take out an insurance policy in their own name to provide them with a certain replacement income in the event of divorce [11] or, at the very least, coverage for some of the costs stemming from the separation (and notably the costs of proceedings).

The limits of divorce risk coverage instruments

24The individual precautionary strategy is neither a universal nor certain coverage instrument. Precautionary savings are a form of coverage reserved for individuals able to put money aside, excluding those at the bottom of the earnings scale. Also, in the long term, nothing guarantees the value of the capital saved by individuals unless they diversify their savings sufficiently. Likewise, the quality of the coverage obtained by remaining in the job market depends on the individuals’ educational level and their employment situation. If a person is on low wages or if the unemployment rate is high, then coverage will be poor.

25Concerning coverage under a collective system of risk mutualization based on a private insurance mechanism, the generosity of the scheme will depend on the amount of the premiums paid by the spouses during the marriage.

26Alimony raises the question of its predictability, at least in cases of contested divorce. [12] Because the law leaves room for interpretation in the granting and setting of the amount, [13] alimony does not provide automatic coverage in the event of a divorce. [14] According to the findings of Doriat-Duban and Bourreau-Dubois (2013), French judges set thresholds on eligibility for alimony (in terms of the degree of income disparity between the partners and the length of the marriage). [15] In other words, as the activation of solidarity between ex-spouses is subject to the discretion of a judge, the party with the sharpest reduction in their standard of living is not certain to receive compensation, and if compensation is granted, the amount received may not be equal to the magnitude of the loss. [16] Alimony, then, is a partial and non-systematic (and even random) coverage instrument.

27In contrast to alimony, marriage contracts provide the partners with predictability on how the costs of a divorce will be divided. But another question is raised, as it is not certain that the marriage contract protects the party for whom the divorce comes at the greater cost. As highlighted by Oosterbeek et al. (2003), this is because the specific domestic investments restrict the exit options of the specialized partner and thus limit his or her power of negotiation. It is for the same reason that Cigno (1991) and Smith (2003) recommend signing a marriage contract at the start of the marriage when the transaction costs related to negotiations are not yet too high. The uncertainties over the degree of protection provided by the marriage contract becomes manifest when the various matrimonial regimes are scrutinized. Not all contracts have the same effects in the event of a divorce. Community of property ensures an even division of the couple’s joint assets after marriage dissolution, while other regimes protect the wealthier spouse and may lead to increased divorce costs for the more vulnerable one (McLellan, 1996). This is the case under the separate property contracts, which protect the wealthier spouse by allowing them to keep all the assets acquired before and during the marriage and by limiting the sharing of assets to those under undivided ownership. Moreover, the current trend in the event of separation appears to be towards a reduction in solidarity between partners, as demonstrated in France by an increase in separate property contracts among married couples (Frémeaux and Leturcq, 2013).

28Beyond the type of contract chosen, it may become impossible to negotiate a marriage contract for various reasons. First, the parties may be affected by optimism bias (Smith, 2003), particularly in first marriages. For example, an American study (Baker and Emery, 1993) based on a survey of future newlyweds, shows that they have a fairly accurate estimation of the overall risk of divorce but strongly underestimate their own risk of divorcing. The authors ascribe this optimism to a representativeness bias (Kahneman and Tversky, 1982), with the interviewees considering themselves as not representative of the population as a whole. Even in the absence of such bias, other sources of excess optimism also exist, as highlighted by Smith (2003). For example, the parties may also underestimate the risk of divorce. Consistent with the work of Kahneman and Tversky (1979), individuals tend to underestimate the high probabilities of negative outcomes, and this reduces their incentive to protect against divorce risk. Second, the idea of negotiating a marriage contract may be perceived as a negative message as to the solidity of the marriage, thus making such a negotiation rather unlikely. These same limits may be at the root of under-insurance against divorce risk.

29Their differences aside, the marriage contract and alimony both share the same limits in terms of divorce risk coverage for the party the most penalized by the marriage breakdown. First, the two systems reduce the costs of divorce only if there is an income to be redistributed or wealth to be shared. In other words, this type of coverage does not work systematically. Second, both alimony and the marriage contract may place upward pressure on divorce costs but without necessarily being able to cover them. By guaranteeing compensation in the event of separation, these systems encourage specific investments (Bianchi et al., 2014). If the specialization is strong, for the spouse who specializes in the domestic sphere it may entail a substantial reduction in earning power over the short and long term, which automatically increases the extent of his or her losses in the event of separation. Yet alimony and marriage contracts are designed to help people cope with the short-term costs of a divorce rather than compensate for the longer-term losses resulting from separation. [17] The fact that the very existence of compensation is liable to increase the magnitude of loss is a well-known mechanism in the economics of insurance, one referred to as a problem of moral hazard. [18]

30In the light of this overview, three main coverage approaches may be distinguished. The first is based on inter-individual solidarity between spouses (alimony and marriage contract), the second on the pooling of risks (private insurance) and the third on individual coverage (remaining in employment, precautionary savings). The first corresponds to the systems enshrined in law. Having existed for a long time in most countries, these systems apply to married couples only. The second, based on market instruments, appears to be emerging in some countries to specifically cover certain types of costs stemming from a divorce (mainly the costs of proceedings, and more rarely the payment of child support). The third approach is also based on a market logic, that of the job market and the financial markets. According to results obtained from US data, some of these different forms of coverage can be partly substituted one for the other. For example, it appears that in a context of no-fault divorce, women living in US states where the law provides for equal sharing of the couple’s assets tend to work less than women living in states where the law is less favourable to women who divorce (Chiappori et al., 2002; Voena, 2012).

Systems for limiting the social costs of divorce

37While the community is not disposed to providing social insurance against divorce risk (see above), it does consider as a new social risk one of the consequences of separation, namely situations of lone parenting (Eydoux and Letablier, 2009; Pollak, 2011). Lone parents are covered by parenting support policies, either in the shape of targeted services (increased RSA welfare benefit) or socio-fiscal transfers aimed at financially supporting households (lone-parent or not) with children. [24] The introduction of guidelines setting the amount of child support for the children of separated parents may also be considered as another way for the legislator to directly regulate the economic consequences of divorce, with a view to limiting its negative impacts on children. This is notably the case when, as in the United States, the judges tasked with resolving differences between the parents are obliged (barring exceptional waivers) to award the amount set by the guideline. In other countries, including France, guidelines can be used, at the very least, to guide the judges’ decisions. The introduction of a rule for calculating the amount of child support subsequent to a divorce provides the state with a way of ensuring the material well-being of children with divorced parents by specifying the parents’ support obligations. Because the calculation rule is based on objective estimates of child costs, it guarantees an adequate standard of living for the child, i.e. consistent with the parents’ abilities to contribute (Bourreau-Dubois and Jeandidier, 2013), and favours better future compliance with judicial decisions.

38The gender inequalities that emerge at the time of divorce are also not considered to constitute a social risk. But these inequalities are taken into consideration, to varying extents, by social protection law. In some countries, “pension splitting” applies in the event of divorce. The principle consists in grouping the pension entitlements acquired by the man and the woman during their union and then splitting them evenly between the two at the moment of the divorce. This rule applies in Germany, Switzerland and Canada. [25] In the UK, pension entitlements are included in the overall assets of the household, which are then shared between the two ex-spouses. This system makes up for the low individual entitlements of women who reduced their working activity during the marriage to make specific investments in domestic life. France has for many years operated a system of family-related pension entitlements designed, notably, to offset the impact of career interruptions on the pension levels of mothers (Bonnet and Hourriez, 2012). Last, gender inequalities subsequent to divorce are, as a last resort, covered by social welfare systems. In France, RSA welfare benefit and the minimum pension form an ultimate safety net for single women in situations of poverty.

39Alongside these systems providing ex post compensation for the gender inequalities resulting from divorce, the state may also use tools aimed at limiting the occurrence of gender inequalities during the marriage which, through a knock-on effect, helps to reduce the risk of poverty post-divorce. The objective here is not for the state to remedy difficult situations or redress gender inequalities but to change the behaviour of individuals. As seen earlier, specific investments in the domestic sphere are very costly for women if they separate. These investments reduce their earned income and, if they have custody of the children, put them at a high risk of poverty. Generally speaking, then, the idea is to encourage mothers to remain in employment after the birth of their children. The trend today is towards greater intervention in this respect on the part of public authorities, as demonstrated by the recent reform of parental leave in France, voted as part of the law on gender equality that, by encouraging fathers to take parental leave, aims to limit gender inequalities associated with divorce. Further upstream in the cycle, the state may also seek to improve the educational levels of women (Guvenen and Rendall, 2013). Lastly, it may use tax incentives, by reducing taxation of dual-earner households, for example, through individualization of income tax (Esping-Andersen, 2008; Landais et al., 2011). [26] Overall, the public interventions that can be rolled out to regulate divorce risk belong both to the traditional conception of social policy (the fight against poverty of lone-parent families) and the modern conception of social policy (aimed at fostering women’s employment) defended by Esping Andersen (2008), for whom the welfare state should be an investor rather than a nursemaid.

Tools for improving the private management of divorce

40The state may also improve the private management of the consequences of divorce by harnessing its power to state the law. If one of the spouses makes specific investments in domestic activity, this leads to problems of efficiency and fairness, as the divorce cancels out the value of the specific investment for the person who made it, and these investments lead to a drop in the standard of living that is not shared equally by the two ex-spouses. And yet it is not unreasonable to think that in a situation of unilateral divorce, the spouse who did not make the specific investment is unlikely to compensate their ex-partner without any prompting. By entrusting judges with the task of deciding on alimony, the state exerts control over the result of the negotiations between spouses in terms of divorce cost sharing. The objective is for the judge to ensure that the interests of both parties are respected and that the divorce does not generate an uneven distribution of divorce costs. The state may, as is the case in France, [27] leave it to the discretion of its agent – the judge – to choose the social justice criterion to be applied. In this case, it is up to the judge to decide on the threshold beyond which the inequality becomes unfair. The level of that threshold depends on the judge’s conception of solidarity between former spouses.

41The choice of statutory matrimonial regime is also an indirect way for the state to play a role in private divorce regulation. By designating community of property as the default legal regime, as is the case in France and Luxembourg, the law helps to protect the weaker partner by ensuring that they obtain half of the assets acquired during the marriage. In contrast, countries such as Austria and the United Kingdom, having opted for a separate property default regime (Granet and Dandoy, 2016), are, in principle, less protective of the spouse who made a specific investment and, by doing so, acquired fewer assets. Naturally, the spouses can sign a marriage contract different to the default regime, enabling them to protect the weaker party by planning for the fair distribution of property in the event of a separation. But owing to status quo bias, the choice of regime is not a neutral one. Because it is reasonable to assume that the spouses opt most often for the default regime and remain under that regime until a potential divorce, it would be in the state’s interest to choose the community regime as the default regime so as to protect the weaker partner in divorce.

42Finally, and again with regard to its legal power, one could imagine a system in which the state requires households to take out insurance policies to resolve a market failing that stems from a phenomenon of under-insurance. Given the existence of optimism bias or a preference for the present, the risk of underinsurance exists, with newlyweds potentially liable to underestimate their divorce risk. The mandatory nature of the insurance policy could be justified for other reasons, too, such as ensuring the solvency of the payer in the event of income loss due to an unexpected life event. [28]