Dear Economist

Efficient divorce

Dear Economist,

I’m afraid to say that my wife and I are getting divorced. We are struggling to work out how to divide our possessions, especially the house. Our arguments are only making a bad situation worse. Is there a solution?

Yours sincerely,

Mr B. Graham, Kent

Dear Mr Graham,

You have my sympathy. Because so many of these shared items have sentimental value, it is hard to come to an amicable agreement. Bluntly speaking, you are both lying about your true preferences to manipulate the bargaining process and get more of the stuff you want.

Economists were, for a while, pessimistic about solving such problems as the incentive to lie typically makes it impossible to efficiently trade an object of sentimental value. The buyer wants to downplay the value and the seller wants to exaggerate it, and the trade is scuppered.

But game theorists Robert Gibbons, Peter Cramton and Paul Klemperer have demonstrated that when an object is jointly owned and one partner must buy out the other, an efficient outcome is easy enough to reach.

Professor Klemperer says that you and your wife must each write down an offer for half the house.

If you name the higher price, you get the house and must pay your wife for her half of it. The price you pay is the average of the prices you each wrote down.

You will be far less tempted to lie, because if you bid too low you have to sell the house cheaply. However if you bid too high you pay dearly for it. You can follow the same process for every object if you wish.

I have only one word of caution. As Professor Klemperer is happily married to his first wife, his advice is presumably straight from the ivory tower.

First published at ft.com.

15th of May, 2004Dear Economist • Comments off