An option pricing theory explanation of the increase in the divorce rate

Abstract

This paper develops an analogy between a financial call option and a child born within wedlock. Outside marriage an unemancipated child represents a real call option to the parent who gains custody. Present value of court ordered monthly child support payment is the market price of the underlying asset. Exercise price is equal to present value of the costs of raising the child. Life of the option stretches from the date on which the divorce decree is issued to the date of emancipation for the child. Variability can be proxied by the standard deviation of the income of the noncustodial parent. A major policy implication evolves from the analogy. The perverse economic incentive of a parent (custodial) to seek custody of the child to exact economic gains out of the other parent (noncustodial) can be mitigated by reducing the value of the call option feature of the child.