Question: Andy and Kim live together Andy may invest 10 000

Andy and Kim live together. Andy may invest $ 10,000 (possibly by taking on an extra job to earn the additional money) in Kim’s MBA education this year. This investment will raise the current value of Kim’s earnings by $ 24,000. If they stay together, they will share the benefit from the additional earnings. However, the probability is 1/2 that they will split up in the future. If they were married and then split, Andy would get half of Kim’s additional earnings. If they were living together without any legal ties and they split, then Andy would get nothing. Suppose that Andy is risk neutral. Will Andy invest in Kim’s education? Does your answer depend on the couple’s legal status?

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  • CreatedNovember 13, 2014
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