Welfare Effects of Fixed and Percentage-Expressed Child Support Awards

Over the last decade a large number of states have significantly altered their legal statutes concerning the disposition of divorce cases involving children. In particular, many states have increasingly employed percentage-expressed orders in which child support obligations in a given period are determined as a proportion of the contemporaneous income of the noncustodial parent. In contrast to more traditional systems in which obligations were set in fixed nominal terms at the time of the divorce settlement and were infrequently (or never) updated, the dynamic system has the advantages of allowing children (and the custodial parent) an opportunity to share in the general income gains experienced by the noncustodial parent over the life cycle and of possibly alleviating some noncompliance problems. In this paper we conduct a rather extensive theory-based empirical investigation of the effects of these systems on the income process for divorced fathers and the child support transfer decision. We estimate a flexible statistical model for the income-generation process for divorced fathers which encompasses the period both before and after the divorce. We interpret the estimates from this model to indicate small behavioral effects of the type of order on postdivorce income, but nonrandom assignment (in terms of the means and variances of predivorce income) into the percentage-expressedorder state. Our analysis of the effects of the order type on child support transfers is divided into two parts. In the first, a "reduced form" analysis, we investigate whether or not the divorced father’s regime—defined as the order type and withholding status—can be considered exogenous vis-á-vis the transfer decision, and examine the relative effects of the various regimes on the transfer rate. We further attempt to investigate order-type effects on compliance in the context of a structural model of the compliance decision. The results of the two analyses are for the most part consistent. Percentage orders are generally associated with lower compliance rates, though withholding tends to alleviate the problem. The highest compliance rates are associated with fixed orders coupled with withholding. Welfare Effects of Fixed and Percentage-Expressed Child Support Awards