Knowledge that Transforms

In this reply I describe the unraveling of transaction dates in several markets, including the labor market for new lawyers hired by large law firms. This and other markets illustrate that unraveling can occur in markets with competitive prices, that it can result in substantial inefficiencies, and that marketplace institutions play a role in restoring efficiency. All of these contradict the conclusions of Priest.

The optimal balance between keeping marriages intact, despite spousal conflict, and allowing for divorce is a subject of policy debate in the United States. To explore the trade-offs, I construct a structural model with information asymmetries, which may generate inefficient outcomes. Parameters are estimated using data from the National Survey of Families and Households. I find that eliminating separation periods decreases the conflict rate by 9.2% of its baseline level and increases the divorce rate by 4.0%. Perfect child support enforcement decreases the frequency of conflict and divorce by 2.7% and 21.2%, respectively, and reduces the incidence of inefficient divorces.