An Economic Model of Child Custody

This paper develops a model of child custody based on an incomplete-contract approach to the allocation of property rights. Because of the presence of transaction costs in marriage, altruistic parents cannot contract upon the investments they make into their children, but can reduce the resulting inefficiencies by determining ex ante the parent who would be allocated custody in case they divorce. We show that: (i) the optimal allocation of custodial rights depends on both preferences and technological factors; (ii) custodial rights can be allocated either to the parent who values the benefits from child welfare more or, viceversa, to the parent with the lowest valuation; (iii) if one parent’s investment is significantly more important than the other parent’s investment, then sole custody is preferred to joint custody and it should be allocated to the parent whose investment is relatively more important; and (iv) if the importance of the parents’ investments is sufficiently similar and if the differences in parents’ valuations of child quality are large, then joint custody is optimal with the low-valuation parent receiving a relatively greater share. The implications of these results are then interpreted in the context of current custody laws, discussed in relation to empirical estimates of some of the parameters underlying the optimal custody rule, and used to question the skepticism surrounding prenuptial contracts. “When by birth a child is subject to a father, it is for the general interest of families, and for the general interest of children, and really for the interest of the particular infant, that the Court should not, except in very extreme cases, interfere with the discretion of the father.” Re Agar-Ellis (1883) [cited in Maidment (1984, p. 98)]. Date: March 10, 2004.