HUME PAPERS ON PUBLIC POLICY
Vol 7 No 2 Spring 1998
Simon J. Clark is a Senior Lecturer in Economics at the
University of Edinburgh.
Antony W. Dnes is the Professor of
Economics at the University of Hertfordshire.
Anne Griffiths is a
Senior Lecturer in the Department of Private Law at the University of
Edinburgh.
Ian Smith is a Lecturer in Economics at the University of
St. Andrews.
Fran Wasoff is a Senior Lecturer in the Department of
Social Policy at the University of Edinburgh.
The rising rate of divorce over recent decades has been greeted by concern among many commentators. Others have seen the trend as indicating a greater freedom of individuals to seek personal happiness, or at least to escape unhappiness. But the general perception is that rather less divorce might be a good thing. In most jurisdictions the law has been changed in an attempt to keep pace with this social trend in divorce. Some of these changes can be seen as making divorce easier to obtain and reservations have been expressed regarding the incentive effects of easier divorce law on the propensity of married couples to seek a divorce. This volume of Hume Papers on Public Policy brings together a collection of papers, each of which addresses some aspect of the interaction between divorce law and divorce.
The contribution by Smith focuses on the apparently divergent moves in divorce law as observed in the recent Family Law Act 1996 in England and Wales, which moves away from fault, and the versions of ‘covenant marriage’ now available in Louisiana and other jurisdictions in the USA, which seem to reintroduce notions of fault. Smith points out that there is more in common here than first meets the eye. The shared emphasis is on the obligation of divorcing couples to seek mediation in the period before any divorce is granted. Not only can such mediation facilitate agreement regarding the division of family assets and the questions regarding access to and support of children, but there is also emphasis placed on the possibility of achieving a rapprochement or marital reconciliation. Rather than being simply an efficient means by which to bury marriages, divorce law is assuming a dimension aimed at saving marriages. Florida has legislation that requires a compulsory preparation-for-marriage module in the school curriculum, and provides financial incentives for couples to undertake prenuptial marriage-preparation courses. Smith also commends the divorce education courses that can be obligatory for some divorcing couples in Florida. All of this arises from a recognition that radical changes, for example in the labour market where the earning opportunities of women have been expanded and enhanced, have rendered the marriage relationship more fragile. The perceived financial risk involved in divorce decreases the incentives to specialise in household production and reduces the gain from marriage. So that events such as periods of ill health or unemployment or, indeed, more positive events can all easily disturb the balance of a marriage. Given the large social costs to divorce, particularly as they affect children, Smith sees a role for government policy through legislation, but particularly through education, in exerting a stabilising influence.
The paper by Wasoff examines the Scottish legal approach to handling divorce. This system, which can be characterised as one of clearly stated principles modified by a framework of discretion, has been in operation since the Family Law (Scotland) Act 1985. The principles essentially point to an equal division of matrimonial property, with the discretion entering through tests as to whether what emerges from the application of these principles is fair and reasonable. The Scottish system provides lots of discretion for judicial intervention to bring about a fair and reasonable division. The transparent manner in which these arrangements work allows legal agents to have an accurate expectation of what the likely judicial resolution of any particular case would be. This then facilitates bargaining-in-the-shadow-of-the-law whereby private bargaining between parties or their agents is coloured by this expectation. By this route, parties reach a private ordering, which is presumed to leave both parties better off (otherwise they can always rely on the court-determined solution). Wasoff argues that while the system may appear rule-bound (and for this treason was rejected as a model of reform for England and Wales), it is, in practice, highly flexible. The author goes on to review some empirical evidence from a sample of the "minutes of agreement" by which such private orderings are formally recorded, and questions whether aspects of power and gender do not still distort many such private orderings to the distinct disadvantage of one of the parties. The Scottish system, however, emerges as both popular and efficient, having been well ahead of England and Wales in, for example, grasping the increasingly important matter of pension entitlements. The system is less strong on mediation and efforts to save marriages.
The theme of the Scottish framework of principles-modified-by-discretion is continued by Griffiths who provides a comprehensive discussion of the labour market and demographic context of divorce to examine whether the combination of private reordering and public provision adequately meets the needs of poor families after divorce or, more generally, relationship breakdown. The answer seems to be a fairly resounding ‘no’. The paper also highlights the important empirical fact that the focus on marriage is increasingly irrelevant for the ever larger numbers of families which grow up and split up outside of marriage. Another empirical point is that although most divorces go to court in the very formal sense, relatively few actually involve litigation of legal dispute. This again emphasises the importance of the private ordering. On examining these private orderings, as exhibited in minutes of agreement, Griffiths reports that in some two-thirds of cases the woman ends up acquiring the husband’s share of the family home (sometimes permanently, in place of other assets such as pensions, or occasionally temporarily, to provide the primary carer with a family home until the children are age 18). In over 90 per cent of cases where children are involved, the children stay with the mother, and for most of these cases explicit child support is agreed. This is in contrast with the assumption of the Children (Scotland) Act 1995 which presumes joint parental responsibility after divorce. Additionally, in only 10 per cent of cases is there any allowance for spousal maintenance, a clean break being the rule, and only in some three per cent of the agreements is there explicit provision for pension splitting. In all of this, the law retains an important power to set aside unreasonable agreements if obtained by fear, force, fraud and so on. Additionally, although such agreements are open to non-married couples they may not be legally enforceable for the non-married.
Griffiths, then turns to examine public support both for low-income marriages and for divorced families, where the failure to allow for the distribution of resources within marriage is seen as a policy failing (for example, by making any child care allowance under the working families tax credit available through the main earner’s wage packet rather than directly to the mother). So too is the failure to recognise the financial distress and resultant marital fragility of low-income families and benefit-dependent families. The Child Support Act 1991 has, of course, altered the original Family Law (Scotland) Act in terms of support for children. As recently amended the system should at least become faster and more effective. The government’s welfare-to work initiatives and the family-friendly employee rights introduced in the Fairness at Work White Paper are all seen as providing greater support to marriage, although certain issues regarding security of housing tenure and low incomes remain to be addressed. There remains, however, a general concern that the regulation of family life through the terms of the legal system (i.e., via public and private law) is based on the concept of marriage, and this may no longer be entirely appropriate.
The matter of pension splitting is the focus of the paper by Dnes. A contrast is made between the Scottish approach of equal division and the approach in England and Wales of meeting needs. The question as to whether pensions have any special role as a marital asset is also addressed. In England and Wales, the answer seems to be that pensions, although of growing empirical importance in household wealth, have traditionally been regarded as too complex to enter into the divorce agreement. One common device employed was to define pension assets as being too ‘remote’ if their maturity date could be regarded as distant. In the light of the Pensions Act 1995 and the Family Law Act 1996, this is no longer an acceptable response, and Dnes reviews the three major approaches to computing the present worth of a pension asset. These are: the current equivalent transfer value (CETV); past service reserve (PSR); and continuing service basis (CSB). An additional complication is that the pension asset can be divided at any one of three times: at divorce; at retirement; or ongoing (earmarked). Dnes notes the strong community property tradition in Scottish divorce legal practice and suggests that the way forward for England and Wales lies with current equivalent transfer value, subject a needs qualification ensuring parties of a reasonable minimum pension.
Dnes emphasises that the exact division of the pension itself depends upon the grounds on which the overall property division is being computed. Drawing on the breach of contract literature, from any one partner’s perspective the ‘damages’ owed arising from divorce can be computed on any one of three bases: restitution; reliance; or expectations. Dnes strongly favours the use of an expectation damages approach to the division of marital property as being the mechanism most consistent with economic efficiency, in the sense that it presents parties with the appropriate incentives when considering marital dissolution. Expounding on the scope for perverse incentives to arise out of carelessly crafted divorce law, Dnes discusses phenomena such as the ‘green grass effect’ and the ‘black widow effect’. The ‘green grass effect’ arises where ‘easy’ divorce law presents one partner with a low cost of exit to marriage, a low cost that will lead to inefficient breaching of the relationship for the sake of relatively modest perceived gains. On the other hand, if payments to a divorcing partner are not ruled out by being the breaching party, then opportunistic behaviour may again be encouraged leading to serial divorces and what Dnes labels the ‘black widow effect’. While coming down in favour of earmarking pension benefits rather than pension splitting, Dnes is aware that this whole recognition of the pension asset, while straight forward and long needlessly overlooked in England and Wales, may represent a change in the ground rules and may, therefore, be more equitably applied to all marriages arising after the adoption of such a practice rather than applying to all marriages extant at the time of such an adoption.
In the final paper in this collection, Clark presents a careful discussion of the incentive effects that the law pertaining to property settlements in divorce as these effects relate to marital stability and the likelihood of divorce. These various rules are seen to make divorce more or less likely depending on their nature. This result, while consistent with common sense, is strongly at odds with the traditional economics literature in this field. Hitherto, the accepted wisdom, as expanded by Nobel Laureate Gary Becker and others, is been that the exact nature of divorce law (e.g., fault versus no-fault) has no bearing on the propensity to divorce. This reasoning relies on the theory of another Nobel Laureate, Ronald Coase, who argues that the exact allocation of property rights between two parties will have no bearing upon the final allocation of the property in question as long as negotiation is costless (or, more generally, as long as transaction costs are zero). In this view, whether or not a divorce occurs is not a matter of legal rights but the relative magnitudes of the gains and losses of divorce. If the gains are large enough then the losses an be compensated for and a divorce will occur. Such an assertion sits uncomfortably against the empirical observation that the marked secular rise in divorce has been accompanied by an equally marked shift in divorce law away from highly restrictive situations, such as in the late nineteenth century in Scotland when a wife, within marriage, had no right to her own moveable property (e.g., money or furniture) even if earned or inherited. The move was towards a more relaxed regime which provided legal aid, allowed divorce petitions to be dealt with by lower courts, and shifted away from the concept of fault. Clark’s analysis depends on seeing the two states of marriage and divorce as providing two distinct regimes wherein the size of the cake (the amount of resources available to the couple ) and the shares of the cake (the property rights of the individuals) could be dramatically different. As dramatically different, in Clark’s terms, as between a Madeira Cake (Marriage) and a Dundee Cake (Divorce). Clark’ conclusion is that unilateral divorce encourages opportunistic behaviour and inhibits trust. Such conditions remove the opportunities for marriage-specific investments and commitments. It is the absence of these investments and commitments (compounded by changes in the outside-of-marriage possibilities that exist for some) that makes marriage less stable and more fragile.
The David Hume Institute is pleased to be able to publish these papers which relate to an increasingly important aspect of social and economic life. This is an area of law and economics that has risen inexorably up the policy agenda over recent years until it is a key consideration as we enter the 21st century. From the analysis presented here, it seems as if the scope for further policy improvements may be limited and, even where possible, may be expensive. But these papers surely provide a sound basis upon which to take the public policy debate forward. As always, it is necessary to clarify that the Institute itself holds no collective view on these policy matters. We do, however, feel that we can recommend the work of the authors produced here as worthwhile contributions to a policy debate of major importance.
Hector L MacQueen and Brian G M Main
Directors
The David Hume
Institute
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