Divorce and Financial Well-Being

Using a life-cycle model of household consumption and investment under family transitions, we investigate the long-run financial outcomes of divorces. We find divorce leads to a reduction in wealth, and the loss is larger for higher-educated women. Earlier fertility and a smaller parenthood penalty for women with only a high school diploma result in negative effects of divorces fading away by age 45, whereas for college-educated women, the same is achieved a decade later because of later fertility and a stronger parenthood penalty. Reduced economies of scale, switching to a single-person income, and losing wealth protection within marriage have the strongest impact on the divorced household economy.