Child Support and Remarriage

This paper studies the reasons for low levels of child support paid by non-custodial divorced fathers. When mothers remarry, some financial burden of raising their children shifts from fathers to step-fathers. This provides an incentive for the father to encourage mother’s remarriage through the use of strategically picked payment level. Assuming father’s income is to some degree unobservable by mother after divorce, I first formulate a theoretical model of the father’s optimal transfer and the mother’s remarriage decision in a two-period dynamic Stackelberg game. The equilibrium closed form solution shows that the father’s optimal transfer is lower when his income is partly unobservable to the mother than when it is fully observable. I then investigate the issue empirically, using data from the Panel Study of Income Dynamics (PSID) in the U.S., examining whether the father’s payment is related to the degree of unobservability of his income, using proxies for that unobservability. The results show that the payment is indeed lower, the greater the degree of unobservability. In terms of the magnitude, associated with 1% increase in the income variation/level ratio, the annual reduction in child support transfer is estimated to be $8-25 in amount or 0.9-2% in likelihood, depending on the measure of income volatility used. JEL Classification Numbers: