My latest piece in the Dom post was about the “economics of love” – where I compared a relationship to a firm, and worked out some basic conclusions.
Now, the article in the Dom was focused on relationships, specifically marriages. However, there are times where the optimal formation for a relationship is more akin to a set of “independent contractors negotiating and renegotiating each time they want to work together to provide a product”.
So what factors are likely to be behind this?
- Option value: Available and interesting individuals appear in your life, of a varying quality, according to some probability distribution. If you commit to a relationship, it is very difficult/costly to take up a “better” person if you run into them. By saying as an individual contractor, you are able to take advantage of these opportunities.
- Diminishing marginal utility: Often, the more you consume something, the less additional value you gain from it. Setting up your relationship profile such that you enter temporary contracts with a number of different individuals may provide higher overall satisfaction than committing to only one permanent contract.
- Diversifying risk: Focusing on one relationship involves taking on all the idiosyncratic risk associated with that individual – if you set up an appropriate portfolio of relationships, you may be able to remove this risk while still achieving the same expected return.
So the optimal solution to the formation of your relationship is a complicated issue – there are the benefits of a strict relationship mentioned in the article, and benefits for non-strict relationship status as mentioned here. I have only covered some of the very basics, in comments feel free to add some more 😉