Friday, January 29, 2010

The contractual view of marriage

One of my former students asked me to write up the contractual view of marriage that I teach in my classes.  Here it is:
POST INVESTMENT HOLDUP ROUTINE (I deliver this after I describe the problem of post investment hold-up and how vertical integration can re-establish the incentive of parties to make relationship specific investments)

When I got engaged, my fiance and I had to go through pre-marital counseling with a priest, and he asked us why we wanted to get married.

I said “Long-term relationships induce higher levels of relationship-specific investment.”

The priest looked as if he didn’t understand, so I said “you know, the kind of investments that differentiate a marriage from a series of meaningless spot-market transactions.”

On our first anniversary, my wife gave me a card declaring that “her relationship-specific investment was earning an abnormally high rate of return.”

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