Love and Taxes – And Matching Institutions
WZB Markets and Politics Working Paper No. SP II 2008-04
34 Pages Posted: 26 Aug 2010
Date Written: February 1, 2008
We study a setting with search frictions in the marriage market and with incomplete contracting inside the family. Everyone prefers a partner that has high income and is a perfect emotional match, but compromises must often be struck. A high income earner may abstain from marrying a low-income earner even though they would be a perfect match emotionally, because the high-income earner may dislike the implicit income redistribution implied by the marriage. Redistributive income taxation may ease this problem. Income matching institutions that secure that people largely from the same income groups meet each other can substitute for redistribution, so that optimal redistribution is reduced. We also introduce a divorce option. Redistributive taxation is shown both to further and stabilize marriage.
Keywords: marriage, optimal taxation, emotional rents, love, incomplete contracts, assortative mating, divorce
JEL Classification: H21, J12, D61
Suggested Citation: Suggested Citation