You are here: Home Projects A: Family and education policies A03: Market failures and family policies

A03: Market failures and family policies

Many countries have reformed their family policies in recent years or hotly debated reforms. In this project, we analyze family policy from an economic perspective. A typical rationale for government intervention is inefficiency caused by market failure. We analyze whether market failures are relevant in the context of families. We focus on four issues: limited commitment, asymmetric information, knowledge externalities and missing markets, and the interaction between private and public family benefits. The project involves theoretical and quantitative components, with applications to Germany, France and South Korea.


Project members (A03)


Policy outreach (A03)


Publications (A03)


Discussion papers (A03)



Family policies in recent years: Public provision of day-care, parental leave, monetary transfers and tax allowances for children, division of assets upon divorce, alimony payments and child support. A large empirical literature evaluates the impact of specific reforms. But why should governments aim to change family behavior through public policy? What frictions and market failures are relevant in the family context? Do they justify recent reforms quantitatively? Develop new theories, combine them with data and estimate quantitative models.

Policy relevance

Governments are wondering whether they should pay people to have more children. Asset division and alimony laws have been changed with potentially unanticipated consequences for female old-age poverty. How do family policies affect inequality and intergenerational mobility? Does it matter if monetary family benefits are paid to the husband or the wife? Does public provision crowd out private-sector family benefits? Understanding the sources of inefficiency is critical for designing optimal policies.

Project plan

Work package 1 - Limited commitment and divorce laws
  • Many family decisions involve long term investments.
  • Limited commitment between spouses causes inefficiently low investments.
  • Costly divorce increases commitment.
  • Application to Germany: Divorce law reform in 2008 (reduced alimony payments).
  • Application to France: Cohabitation vs. marriage (differ in separation costs and asset division).
Work package 2 - Asymmetric information in the family
  • Empirical work documents private information in families (e.g., about income).
  • Develop theories of the household with informational frictions (using mechanism design).
  • Application to household budgeting systems (using EU-SILC data).
  • Private information is relevant for many family policies, e.g., who should be the recipient of a government transfer?
Work package 3 - Missing markets, knowledge externalities and fertility policy
  • Many governments concerned about low fertility have implemented policies to stimulate fertility.
  • Do parents underinvest in the quantity and quality of children because of knowledge externalities or missing markets?
  • Design policies to address such inefficiencies (taking heterogeneity and long-run effects into account).
  • Application to Germany: Daycare subsidies and “Herdprämie".
  • Application to South Korea: Child subsidy programs introduced in recent years.
Work package 4 - Public versus private provision
  • Many employers provide family-friendly workplace policies (FFWP). Does private provision reduce the need for government provision? Does public provision crowd out private provision?
  • Analyze FFWP in Germany using a linked employer-employee data set on German establishments, 2002-2014.
  • What are firm correlates of FFWP?
  • Do FFWP shorten the labor market breaks of mothers associated with child birth?
  • Do FFWP act as a compensating differential in the labor market?


Document Actions