Non-technical summary

Research Question

Families play an important role in providing insurance against adverse economic shocks. It is well documented in the literature that they adjust within-family decisions, such as consumption and labor supply, after a shock. However, there is little research on whether and how families change the structure of the family itself, such as divorce. This paper studies empirically and theoretically the impact of labor market shocks on divorce and intra-household reallocation exploiting a natural-experimental earthquake shock and large-scale panel data.

Contribution

Our first contribution is to provide novel individual-level evidence that families change their divorce decisions in response to an unexpected adverse economic shock. Compared to existing studies, our use of the earthquake shock has a major advantage in that it is completely exogenous and unexpected. Moreover, the massive shock affects a large area with rich heterogeneity in its intensity. Second, we elucidate the mechanism behind how the gender-specific labor market shock affects divorce decisions. The earthquake worsened labor market conditions for female workers, but not for male workers due to a surge in reconstruction-related labor demand. The negative labor market shock makes women more financially dependent on their partners, which reduces the probability of divorce. Our third contribution is to provide empirical evidence for the theoretical prediction of intra-household resource reallocation using a unique dataset on individual consumption expenditures and time use.

Results

We show empirically that the probability of divorce of households who are stronger affected by the earthquake declines because the value of divorce for wives decreases due to the labor market shock, while the value of marriage remains high due to the family insurance. We show that these results are consistent with a collective household model with limited commitment. Consistent with our theoretical prediction, we provide direct evidence of an intra-household reallocation of consumption and leisure from the wife to the husband.