A Note on Cohabitation and Marriage

Why do some couples marry, while others prefer cohabitation? The proposed model does not assume utility differences between these two states but assumes separation frictions in marriage and not in cohabitation. We show that high expectations from the relationship lead to marriage even though the utility is drawn from the same distribution as in cohabitation. Moreover, mutual agreement on marriage may take place when the expected utility in partnership is both a private and a common knowledge, although for different sets of expected utility values. Surprisingly, when the expected utility is relatively low, marriage may take place only in the common knowledge environment.