Taking the awkwardness out of a Prenup—A Game Theoretic solution

I would strongly ad­vise you to look at the short re­view on Thomas Schel­ling’s Strat­egy of Con­flict posted on Less Wrong some time back. The idea that de­liber­ately con­strain­ing one’s own choices can ac­tu­ally leave a per­son bet­ter off in a ne­go­ti­a­tion is a very in­ter­est­ing one. The most clas­sic game the­o­retic ex­am­ple of this is the game of Chicken. In the game of Chicken, two peo­ple drive to­ward each other on a wide free­way. If nei­ther of them swerve, they both stand to lose by way of sub­stan­tial fi­nan­cial dam­age and pos­si­ble loss of lives. If not, the first one to swerve is the prover­bial “chicken” and stands to lose face against the other per­son who was brave enough to not swerve. If one per­son were to throw away their steer­ing wheel and blind­fold them­selves be­fore driv­ing on the free­way, that would force the other per­son to swerve given that the first per­son has com­pletely given up con­trol of the situ­a­tion.

There is a slightly more gen­er­al­iz­able ex­am­ple of a similar prin­ci­ple at work. Sup­pose you wanted to buy a used car from a car dealer and were pre­pared to pay up to $5000 for the car and the car dealer in turn was will­ing to sell it for any price above $4000. In such a situ­a­tion, any price be­tween $4000 and $5000 is an ad­mis­si­ble solu­tion. How­ever you ideally want to pay as close to $4000 as pos­si­ble, while the car dealer would like you to pay close to $5000. In a such a situ­a­tion, each party would pre­tend that their “last price” (the price that rep­re­sents the worst pos­si­ble out­come for them, which they would nonethe­less be will­ing to ac­cept) was differ­ent from the true last price, since if one party re­al­izes the other party’s true last price, that party can put it to effec­tive use in the ne­go­ti­a­tion. Let us now as­sume a situ­a­tion wherein you and the car dealer know perfectly well about the each other’s fi­nan­cial de­tails, the de­gree of ur­gency in hav­ing the trans­ac­tion done etc., and have a very re­li­able idea of the last price of the other per­son. Now, you can break the sym­me­try and get the best pos­si­ble deal out of the situ­a­tion by de­liber­ately hand­i­cap­ping your­self in the fol­low­ing fash­ion. You sign a con­tract with a third party in­di­vi­d­ual which states that if you hap­pen to do this trans­ac­tion and pay more than $4000, you will have to pay the third party $1500. Now, all you need to do is show this con­tract to your used card dealer which would make it clear to him that your last price has now shrunk to $4000 since pay­ing any­thing above that effec­tively means pay­ing in ex­cess of $5500 which is well past your origi­nal last price.

For coun­tries that face the men­ace of air­line hi­jack­ing, it can like­wise be an effec­tive de­ter­rent to fu­ture hi­jack­ers if re­lease of ter­ror­ists or other kinds of ne­go­ti­a­tions with hi­jack­ers were ex­plic­itly pro­hibited by the coun­try’s laws, and these laws would be im­pos­si­ble to over­turn dur­ing a hi­jack­ing in­ci­dent.

This brings to mind the fol­low­ing ques­tion. Why don’t there ex­ist com­pa­nies that ex­plic­itly sign con­tracts with in­di­vi­d­u­als or other en­tities for a fee, which would hand­i­cap the en­tities in some way that can­not be eas­ily over­turned and con­se­quently give them ne­go­ti­at­ing lev­er­age as a re­sult.

One ex­am­ple I can think of is per­tain­ing to wealthy in­di­vi­d­u­als in Cal­ifor­nia and other US States with Com­mu­nity Prop­erty laws. Given the high di­vorce rates in the US, it would be pru­dent for such in­di­vi­d­u­als to have as tight prenup­tial agree­ments as pos­si­ble prior to get­ting mar­ried, to min­i­mize fi­nan­cial loss in the event of a di­vorce and also to avoid fi­nan­cially in­cen­tiviz­ing one’s spouse to ini­ti­ate a di­vorce with a promise of a fi­nan­cial wind­fall. How­ever there are some prac­ti­cal difficul­ties which might make many such in­di­vi­d­u­als shy away from do­ing this. A cou­ple of the prac­ti­cal is­sues are:

A. It is clearly rather un­ro­man­tic to have to hag­gle with one’s fi­ancée and their lawyers re­gard­ing a prenup­tial agree­ment. The im­plied “lack of be­lief” in the po­ten­tial dura­bil­ity of the mar­riage might be a turn off for one’s part­ner and other close peo­ple in­volved.

B. The in­di­vi­d­u­als them­selves might get car­ried away by emo­tion and be­lieve that they have found “the one” and as­sign a much lower prob­a­bil­ity of di­vorce or forcible con­ces­sions that they would need to make in fu­ture when faced with the threat of di­vorce. In such a situ­a­tion, they would fail to re­al­ize that prob­a­bly 50% of Amer­i­cans who felt they found “the one” just like them, went on to even­tu­ally get di­vorced.

Now imag­ine the benefi­cial role a com­pany sign­ing such con­tracts could provide. The in­di­vi­d­ual in ques­tion could sign a con­tract with this com­pany stat­ing that if they were to get mar­ried with­out a bul­let proof pre-speci­fied prenup­tial agree­ment, the com­pany could lay claim to half their net worth im­me­di­ately af­ter the wed­ding were reg­istered. Ideally, the in­di­vi­d­ual in ques­tion could sign such a con­tract when they were sin­gle or not se­ri­ously see­ing any­one with the in­ten­tion of get­ting mar­ried. The ad­van­tage of such a con­tract is the fol­low­ing:

1. Com­mu­nity prop­erty and other mod­ern di­vorce laws es­sen­tially change the de­faults with re­gard to what hap­pens in the af­ter­math of a di­vorce, com­pared to how mar­riages worked prior to the ex­is­tence of such laws. Such a con­tract would re­set the de­fault state to one where nei­ther party would fi­nan­cially profit in the af­ter­math of a di­vorce. Most of the awk­ward­ness comes when try­ing to over­ride the de­fault state with a bunch of le­gal rid­ers at the time of a wed­ding.

2. The ad­van­tage of sign­ing up for a con­tract well in ad­vance is that the afore­said in­di­vi­d­ual is then not ex­posed to is­sues A and B above. Sign­ing a tight pre-nup­tial agree­ment in the back­ground of such a con­tract, sim­ply means that the in­di­vi­d­ual in ques­tion has no de­sire to part with half their fi­nances to this third party com­pany. It makes no im­plicit state­ment about the in­di­vi­d­ual’s prob­a­bil­ity es­ti­mate for the dura­bil­ity of the mar­riage. There always ex­ists the plau­si­ble ex­pla­na­tion that the in­di­vi­d­ual in ques­tion was op­posed to non-prenup mar­riages in the past, but now saw no need for that given that they sub­se­quently found “the one”. How­ever they are con­strained by a cer­tain con­tract they signed in the past that they are now pow­er­less to change.

Do you know if there are en­tities that play the role of the third party com­pany with re­gard to sign­ing con­tracts that en­able peo­ple to hand­i­cap them­selves and con­se­quently come out stronger in fu­ture ne­go­ti­a­tions? Do you know of peo­ple who did this speci­fi­cally with re­gard to prenup­tial agree­ments? If such com­pa­nies don’t ex­ist, is that a po­ten­tial busi­ness op­por­tu­nity? I would love to hear from you in the com­ments.