The Law & Economics Letter

Divorce laws typically call (in separate provisions) for both a division of assets and a reallocation of income through alimony or maintenance. This is problematic for income derived from assets, since asset pricing theory tells us that the sole value of an economic asset arises from its income. If an asset is assigned to one ex-spouse, but its income is also included in calculating alimony owed by that spouse, this creates a double counting of the asset’s value in settling the divorce. New York has for some time prohibited this double counting for intangible assets, but a recent case stubbornly refused to extend the principle to tangible ones. New York is not alone in its confusion, however: across the country, the law is muddled on this issue and gives rise to some bizarrely bad economics.

In two recent cases, public servants convicted of wrongdoing, former Illinois Governor George Ryan and former Massachusetts court officer John Bulger, have sued to retain their pension benefits despite their convictions. On a basic level, the courts’ responses have accorded quite well with economic theory, as laid out in a seminal 1974 article by Gary Becker and George Stigler: officials’ pensions are an integral part of a compensation scheme that serves precisely to discourage malfeasance. Terminating pensions after criminal convictions is thus eminently appropriate. However, the Illinois courts have dealt well with an unusual wrinkle in Ryan’s case—employees of multiple jurisdictions only lose benefits from the jurisdiction where malfeasance occurred, but malfeasance at any point in time forfeits benefits accrued in years when the official was obeying the law—while the legal system has not dealt so well with a wrinkle in Bulger’s case: his ability to recover contributions made into the pension system.