The economics of love
Fri 13 Apr 2012 by Matt Nolan.

In my time as an economist I have often found that there is only one issue that creates greater confusion among people than the technobabble we normally speak, that is the issue of love. Fortunately, the economic framework provides a way for us to understand all interpersonal relationships, including love. As a result, by following the economic lessons provided in this article we will be able to learn how to be a better partner to our current or future spouse.

Now to some it may seem perverse to frame something as gentle, volatile, and precious as love in the cold hard words of economics. However, if we are truly committed to being a better partner we need to cast off this view of economics, and risk asking exactly how economics views a relationship.

For an economist, a relationship can be viewed in the same way as a firm. Just like a firm, a relationship involves a number of individuals (usually two) who can work together to create a good or service – in this case the service created is the benefit of a relationship.

The individuals that make up a potential firm could act as independent contractors negotiating and renegotiating each time they want to work together to provide a product, or they could form a firm as a legal entity thereby fixing a set of contracts for a more prolonged period of time.

The myriad of potential structures for a romantic relationship mirror this view of the firm, with marriage an example of the strictest possible contract structure.

Given this, why would the theory of the firm suggest that marriages make sense? Well, the effort you put into a relationship is specific to that relationship (asset specificity) and without a clear commitment or contract the other person in a relationship may use this as an opportunity to renegotiate the conditions of the relationship. Furthermore, there are considerable costs from constantly predetermining whether you and another person are in a relationship. In this view, a committed relationship such as a marriage, civil union, or long-term partnership makes a lot of sense.

So given this way of framing a relationship, what lessons can be taken from the study of firms and applied to everyday relationships?

The best signals are hard to fake: Contrary to popular belief, it is impossible to read your partner’s mind. As a result, signalling your intentions and feelings is an important part of a relationship. However, some signals are better than others.

Some signals are relatively cheap to provide, such as buying your partner a thoughtless cheap gift. Such a gift doesn’t cost you much and likely shows no real investment in understanding the other person. Such signals aren’t going to help out your relationship.

However, other signals are costly or difficult to fake. Swearing your undying love in an honest way, or making an effort to find out something specific about your partner and then going out of your way to show an interest are more costly signals. Someone who was uninterested in a relationship would not provide a costly to fake signal. So if you provide one of these hard to fake signals it tells your partner you actually do care.

Without co-operation, people will underinvest in a relationship: Investing time and love in one relationship does not translate into other potential future relationships – such investment is person specific. Given that there is no certainty that even the most beautiful relationships will last forever, people may invest less in a relationship than they would if they knew it would last.

A marriage contract offers a commitment to stay in a relationship (by making leaving costly), thereby avoiding this issue and increasing the amount people invest in a relationship. By increasing the cost of breaking up, marriage may increase a couple’s commitment to make things work- thereby increasing the amount they invest in the relationship and making them both better off!

Co-ordination is king: Negotiations are an undeniably important part of any relationship, especially when the partners want different things. However, often the argument that occurs during these negotiations leaves both partners worse off. By communicating and thereby co-ordinating plans, it is possible to make both individuals happier – even if neither partner gets exactly what they want.

Sometimes you have to settle: The quality of any relationship takes time and effort to determine. As a result, rather than looking for your ideal or perfect partner it makes sense to look for a person who is “good enough”. If you are with someone reasonable, and the cost of searching for that dreamboat exceeds the expected benefit from looking around, then it is in your interest to settle down.

Hopefully, these conclusions from the depths of economics can help to provide you with inspiration for your current relationship, or search for one. And even if you didn’t find this useful at all, hopefully it gave you a perspective into some of the more important issues that economists look at when analysing firms.

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