In the early 1990s, a number of American legal thinkers began to question the justification for retaining a support obligation between former spouses when they divorced, in a society where adultery is no longer penalized in divorce law and women have become more financially autonomous. They found the answers in economic analysis. This article examines the two main approaches that drew the attention of legal writers. The first derives from the economy of the family and is based on the principle of efficiency. The second draws on the economy of contracts and is concerned with the nature of the relationship between the spouses. This attention to economic analysis is novel, from the European standpoint, because we see no evidence of that approach in the European literature dealing with the legal treatment of the economic inequalities between former spouses at the time of divorce.

We study the relation of financial contracting and the pace of technological advance in a dynamic agency theoretic model. A firm which is financed by outside shareholders but run by managers has the prospect of a process innovation which arrives stochastically. Adopting the innovation requires firing old management and hiring new with skills appropriate for the new technique. We show that subgame perfect equilibria in this game can be of two types. In “entrenchment” equilibrium once the new technique has been announced old style management raises their dividend payout sufficiently to preempt the innovation. In “maximum rent extraction” equilibrium’ managers are unable or unwilling to match the impending productivity improvement and instead respond by increasing their perquisites for the remaining time of their tenure. We show that both equilibria involve several types of inefficiencies and can result in underinvestment in positive NPV projects. We discuss the role of financial innovation in reducing the inefficiencies identified.