Week 12: Exit Markets & the Redesign

Divorce as an exit market, and the semester's one required act of self-doubt about its own framework

15 May 2028

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Every market needs an exit option or its participants aren’t really choosing to stay — they’re trapped. This week treats separation the same way it treated formation: search costs for re-entering the market from scratch, sunk costs that keep people past the point a fresh analysis would recommend, and the asymmetric information problem of never quite knowing, from inside a relationship, what your own outside option is actually worth.

Alex and Sam, the couple who negotiated a lease split back in week 9, are now negotiating something bigger: whether to stay together at all. The same three costs apply, and the same unverifiable-claim problem applies too — except this time, the stakes of being believed are the whole relationship, not just who pays more rent.

Then the semester turns the model on itself, on purpose. Every week since week 7 has circled back to one unresolved question — “the model can’t say who decides” — under a different name: who breaks a standoff, who gets labelled the proposer, whose outside-option claim gets believed, which equilibrium two people settle into, who designs the rule. Collected side by side, those aren’t five separate gaps, and they’re not even the first five: weeks 1, 3, 4, 5, and 6 were quietly asking the same question the whole time. They’re one variable — bargaining power — that this semester’s toolkit never had a term for, showing up ten times under ten different names.

That’s the shape of the self-doubt this week asks for, and it’s also the shape of the capstone: not “the model is wrong,” which is too easy to say and explains nothing, but a specific place where a market framework goes silent, for a case you choose yourself. The capstone is where you answer that for us, not the other way around.

Outline#

• exit as a market with its own search costs and sunk costs, applied to Alex and Sam’s decision to stay or leave
• why identical facts can produce different outcomes once bargaining power is added to Nash bargaining
• collecting ten weeks of “the model can’t say who decides” into one missing variable
• what naming bargaining power still doesn’t explain — where it comes from
• the capstone brief, and what “stands on its own” means for a project built to question its own premise

One thing this framework won’t explain#

Giving the missing variable a name — bargaining power — doesn’t explain it. The model still has nothing to say about where bargaining power itself comes from: why one partner’s threat to leave is credible and the other’s isn’t, why one person’s outside-option claim gets believed and another’s doesn’t. Naming the gap was always easier than closing it.

Laid end to end, this course’s ten “the model can’t say who decides” moments were never ten separate failures. Week 7 couldn’t say who breaks a standoff. Week 8 couldn’t say who gets labelled the proposer. Week 9 couldn’t say whose outside-option claim gets believed. Week 10 couldn’t say which of many equilibria two people settle into. Week 11 couldn’t say who gets to design the mechanism. Even the earlier weeks fit the same pattern one level down: week 1’s value of not being rushed, week 3’s costliness that never guaranteed relevance, week 4’s adverse selection that couldn’t distinguish its own causes, week 5’s cost the honest type still had to pay, week 6’s secretary problem that only ever let one side choose — every one of them is bargaining power, or its absence, wearing a different costume. There is no week 13 for this gap to defer to. The capstone is where you go find it in a market of your own choosing, and say out loud where the model you build goes silent, instead of letting a professor say it for you.

Further reading#

• Becker, G. S. (1973). “A Theory of Marriage: Part I.” Journal of Political Economy, 81(4), 813–846. The paper this entire semester has been extending: the first attempt to model marriage formation and dissolution with the tools of price theory, marriage markets and all. Worth re-reading now that you can see what it does and doesn’t say about who holds power inside the household it models.
• Stevenson, B., & Wolfers, J. (2006). “Bargaining in the Shadow of the Law: Divorce Laws and Family Distress.” Quarterly Journal of Economics, 121(1), 267–288. Shows that a change in exit rights — unilateral divorce law — shifted real bargaining power inside existing marriages, measurably reducing domestic violence and female suicide, without anyone renegotiating a single explicit term. Bargaining power moving the outcome, with no new information and no new agreement, is this week’s whole argument made real.