The Law and Economics of Adoption

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(this is an early draft of an article which appeared in the New Palgrave Dictionary of Law and Economics)

John Palmer

The University of Western Ontario

The adoption of a child by non-biological parents is the transfer of a limited property right. To understand an economics-and-law analysis of adoption, one must first examine the nature of this property right. Then the conditions of exchange can be studied and assessed.

The property right that is being exchanged is a parenthood right -- the right to take on the rights and obligations that accompany parenting a child. These rights are limited by governments in many different ways. One may not buy and sell these rights, one may not readily dispose of one's "property", nor may one indiscriminately cause harm to the property. Also, one must provide food, clothing, shelter, and education for the property. These limitations have been imposed upon the owners of all such property in the class, whether the property right was acquired biologically or via exchange.

Changing Supply Conditions

Through the first half of the twentieth century, into the 1950s, the primary issue in adoption was finding acceptable homes for children, including adoptable infants born out of wedlock. Beginning in the 1960s, though, shortages of normal healthy infants emerged. This dramatic shift in the supply and demand conditions has been related to many concurrent shifts in relative prices, technology and tastes. Certainly one of the major determinants of the reduced supply of parenthood rights for adoptable infants has been the falling birth rates themselves, throughout the entire populations (and not just among unwed mothers) of industrialized countries. This decline in birth rates has been related to rises in the labour force participation rates of females and to lower-cost and more reliable birth control technologies (see Medoff 1993).

Another variable influencing the supply side of this market has been the continued raising of the social safety net, making it increasingly economically feasible for single parents to raise the children born to them rather than put the children up for adoption. Without increased welfare payments, Aid to Families with Dependent Children (in the United States), and increased support for day care programmes for the children of single parents, many of these parents would choose not to retain the parenthood rights to their children. Instead, they would choose to put the children up for adoption or, in some instances, choose not to create them in the first place.

Interestingly, it appears that the increased availability and declining price of abortions has had no statistically significant effect on the supply of adoptions, at least not in the U.S. (Medoff 1993). It seems a priori that the decriminalization of abortions and the resulting lower price, along with government support for abortions in many countries should have been expected to lead to a reduced supply of adoptions, but apparently these effects have not been very strong.

Within the past few years, another source of restrictions on supply has emerged as unwed fathers have sought to block the placement of children for adoption. Males have successfully filed suit to block the placement of their biological offspring in adoptive homes, arguing that (a) they have a legal entitlement to the parenthood rights even if the biological mother does not wish to retain the rights and (b) they were often not informed about the existence of the offspring (see Hansen 1993 and Shoop 1992 and the case law cited in these articles). The effect of these decisions has been both to reduce the supply of parenthood rights and to increase the risk to the parties acquiring them. One of the features of the U.S. Adoption Promotion and Stability Act of 1996 has been to establish a type of doctrine of lost grant or statute of limitations for claims from biological parents. The desired effect of this provision is to reduce considerably the risk to adopting parents that they will have to relinquish the rights in future years. Another effect, however, is that biological fathers who are not aware of the birth of a child they fathered will lose some parenthood rights they might otherwise have wanted to retain.


As a result of these reductions in supply, the market faces a chronic shortage at current prices. It has been estimated that approximately only one in thirty of the couples applying for adoption will receive the child they want (Gubernick 1991a). With shortages this large, one can readily imagine that prices are well below the market clearing price and there is considerable lost consumer and producer surplus. In standard economic markets, a shortage would signal that prices should be expected to rise to re-equate the quantity supplied with the quantity demanded. Yet this has not happened in the "market" for adoptable infants, at least not in any direct way. The sole explanation for this difference is the intervention of the state in this market. If people were free to make contracts about the exchange of this limited property right, and if the state enforced these contracts as it enforces other contracts, then the emergence of a shortage at the current price would inevitably lead to an increase in the price (For one of the earliest academic treatments of this issue, see Posner and Landes [1978]).

The major reason that these markets have not evolved in this fashion or in any other straight-forward pattern is that markets to exchange these limited rights and obligations would give the impression of promoting the exchange of human beings. This commodification of infants is seen as repugnant and unethical by many people. The result of this widely prevalent view is that the state intervenes.

From a broader perspective, state intervention in these markets is justified on the grounds that it is warranted by social-welfare-function considerations. Most reasonable constructions of the social welfare function would include the net present value of the expected future self-perceived well-being of the infants being "exchanged" in these markets, and yet the infants are not in a position to make decisions in their own best interests. In most traditional families, the parents are expected make decisions on behalf of the children, but in the case of adoptable infants, we expect the state to act on their behalf. It is not at all clear, however, that the state does so successfully.

In a review of adoption outcomes, Wierzbicki (1993: 447) found that "...adoptees had significantly higher levels of maladjustments, ... higher levels of externalizing disorders and academic problems than nonadoptees." The crucial law and economics question concerning results like this is, "How would these children have fared under some alternative institutional arrangement?" Would they have done better if their parenthood rights had been be retained by their biological parent(s)? Would they have done better if they had been placed via some alternative scheme(s)? Or are these simply infants who are doomed to unhappiness and maladjustment with a high probability? Because of the counter-factual nature of the hypothesis to be tested, there is no clear answer to this question.

Based on the data that adoptions frequently do not seem to work out, there has been increased emphasis on encouraging biological mothers to retain the parenthood rights to their children. Concomitantly, governments are being exhorted to increase their counseling and training programs for young, single parents, to reduce the chances of their raising poorly adjusted children (see, for example, Donnelly and Voydanoff 1996). Not everyone agrees with these recommendations, however, questioning whether it is more cost-effective to counsel single parents than it is to counsel adoptive parents and their children (for this and related arguments, see Lowe 1996 and Bartholet 1994). In addition, there is evidence that the present scheme may be no better than alternatives which would place more reliance on market forces.

Games and Losses Under Non-Market Allocation

Typically when a prospective couple approaches an adoption agency to adopt a child, they are told that the likelihood of receiving one is low, and even then the wait will be long. They are also told that there are many "hard-to-place" children available for adoption -- children who are older, who have physical or mental disabilities, or who are of mixed racial background. They are encouraged to consider adopting one of these children rather than wait for a normal healthy infant.

At this point, the couple must engage in some game-playing with the agency. The typical game is that the couple would prefer a "hard-to-place" child to no child at all, but they would prefer a normal healthy infant to a "hard-to-place" child. Also, they do not wish to appear unloving, uncaring, ungenerous, etc. to the agency worker(s), and so they think they must say they would be willing to adopt one of these children even though they would prefer not to. But then they fear that if they say they would be willing to take a "hard-to-place" child, even though that would be far from their first choice, they will receive one.

Agencies are given authority by the state to act as intermediaries in these transactions. Their mandate typically involves some phrase encouraging them to act in the "best interest of each child," but when there are many children involved, this mandate is not particularly helpful. Agency workers believe that placing hard-to-place children in adoptive homes is preferable to foster-home or group-home alternatives even though the expected outcome of such adoptions is not particularly good, on average (Society 1993). They also are under financial pressure to place these children in adoptive homes rather than have to pay for their upkeep in foster or group homes. Like many employment, dating, or real estate agencies, their objective often appears to be to maximize placements. After all, maximizing the quality of the placements requires attaching weights to the preferences of all the people involved, a task which would meet with considerable difficulty if anyone attempted to formalize it.

This difficulty can be most readily seen by considering the following dilemma: an agency has two children, C and D to place in two homes, A and B. Both homes would prefer child C, but home A does not have a strong desire to become parents at all. They are on the margin between wanting to acquire a consumer durable, such as a recreational vehicle, and wanting to spend money raising a child. And they definitely do not want child D. Meanwhile home B would be willing to take child D rather than have no child at all, but it would much rather have child C. It is clear that if the adopting homes were required to pay very much for the parenthood rights to these children, home A would choose a recreational vehicle over a child, and home B would end up with child C, the one they prefer. Child D would end up in foster care or in a group home.

Contrast this outcome with the likely outcome under present-day institutional arrangements. In an attempt to maximize adoption placements and minimize foster or group home placements, the agency has an incentive to place child C with home A and child D with home B. In the first scenario, home B receives what it has a strong preference for; in the second scenario, both homes receive a child, but neither home has particularly strong preferences for the result. Follow-up studies of adoption indicate that this second scenario is more likely to lead to poor adoption outcomes (Palmer 1986); nevertheless, it is the more likely outcome under these incentives.

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To formalize the argument in the previous section, the current agency-adoption scheme, by allocating parenthood rights to homes on some basis other than willingness to pay, causes dramatic losses in consumer surplus. Those who are at the upper end of the demand curve may not receive a child, while those who are down near the lower left end of the curve may receive a child. There is a resulting transfer of consumer surplus from those who would be willing to pay high prices but do not receive a child to those who would not be willing to pay very much but do receive a child.

The size of this lost consumer surplus depends on how closely agency allocation criteria mirror consumer willingness to pay, the price elasticity of demand, and the sizes of the administered price (often a nominal fee) and what the market price would be if an unfettered market existed. Palmer (1986) has roughly calculated that for the U.S. market, this loss was somewhere between $45 million and $1.7 billion per year in 1971 dollars. There is quite obviously a great deal of imprecision in these estimates, but even the lowest ones indicate that the loss has been large. And these losses refer only to consumer surplus -- lost producer surplus from not allowing people to produce more to satisfy the market demand is not included in these estimates. The size of these losses begs the question of why society tolerates their continuation: why do we tolerate the continued imposition of such large losses on such relatively few people to the benefit of so few whose benefit is so much smaller than the loss?

Why Not Use the Market?

As noted earlier, one important reason for eschewing reliance upon market forces to allocate these parenthood rights is concern about the moral implications of selling babies. Many people have argued informally that the primary reason Richard Posner is not a U.S. Supreme Court Justice is his having published his article with Landes in 1978 [Professor Newman: please feel free to delete this sentence if you wish]. But there are many other reasons as well, some more noble than others.

Among the more noble are concerns about the welfare of the adopted and unadopted children. The present scheme, it is argued, allocates more children to more homes than would a market scheme. This concern is misplaced, however, because it implicitly assumes that there would be one, single fixed price for the exchange of parenthood rights. Instead, a market would likely see a complex structure of prices emerge for the parenthood rights to children of various "qualities". Normal healthy infants of a desired race and with desirable, credentialized genetic backgrounds would fetch high prices. Others would go for lower prices. Intermediation would continue to evolve to reduce the transactions costs.

The Allocation of Risk

One of the concerns about using market forces to expedite the allocation of parenthood rights to infants addresses a question which lies at the heart of economic analysis of law: who is the least-cost bearer of the risk? What if the child turns out to be different from what the adopting parents expected? Under present schemes, the risk is generally borne by the adopting parents, as it is by biological parents, if the child turns out not to be what they had hoped for. However, contracts to exchange parenthood rights will necessarily evolve to allocate various risks, and the exchange prices will vary with the risk allocation. Also, specialized intermediaries, an extension of many of the private services presently available, would emerge, in part to reduce transactions costs and in part to allocate the risks more explicitly and efficiently.

Recent litigation has indicated that risk allocation is a concern, even under agency-placement schemes. Agencies have long been held liable for misrepresentation of the quality of the product they have sold, e.g. for telling parents that a prospective adoptee has no known health problems when they know it does. Increasingly, agencies are also being held liable for negligence, for not investigating the child's health and background to identify potential risks. Given the concerns about risk allocation under current schemes (see Hellwege 1995), it is not unreasonable to expect that these concerns will only grow, no matter what scheme is used. As court cases continue to define the responsibilities of sellers, buyers and intermediaries, the allocation of risk will become increasingly clear.

Another concern is the effect of the market on "hard-to-place" children. Some of these children are placed under the current scheme because of the shortages of the easier-to-place children; prospective adopters take them rather than settle for no child at all. Under a scheme that relies more heavily on the market, these children would not be placed at high prices. In fact they might not be placed at even a zero price. Indeed, many of them remain unplaced at low or zero prices under current schemes. The result has been that many of these children end up in perpetual foster care or in group homes. Recent policy has encouraged government funded agencies to provide subsidies to adopting parents to encourage the adoption of such children (Rubin, Katz, and Tin 1996). In essence, these proposals recommend allowing the price of the parenthood rights to these children to drop below zero.

Consider an intermediary who has contracted with a supplier to provide a good of a particular quality to a buyer. If the good does not measure up to the agreed upon quality, the buyer refuses delivery and/or sues for breach of contract. If this were to happen with parenthood rights to a child, the intermediary would have the responsibility of caring for the child. Rather than bear this expense directly, especially since their childcare would likely be under considerable scrutiny and would be quite costly, they would likely prefer to pay someone else to assume the parenthood rights to the child. Put crassly, they would sell the child for a negative price. This market-driven outcome would not, however, be much different from the subsidies offered by government-funded agencies, or from payments to foster parents and to group homes, under current placement schemes.

One type of subsidy that has received considerable support is a tax-credit for adopting parents (Clinton 1996), which has been included in the U.S. Adoption Promotion and Stability Act of 1996. While this tax credit will surely increase the demand for adoptable infants, the hope of its framers is that it would also encourage adoption rather than fostering of other children (Shoop 1994). Another effect of the subsidy is that it brings private adoptions and grey-market adoptions (a euphemism applied to private adoptions which are legal but which many adoption agencies think are immoral and ought to be illegal) within the financial reach of middle and lower-middle income households. Interestingly, schemes such as this could also be used to address the concerns of those who object to more market-oriented allocation schemes on the grounds that under such schemes, less wealthy households would be outbid for the more desirable children. It isn't clear, though, why this result would be particularly bad, or any more or less desirable than the same result for automobiles, houses, clothing, etc., all of which have higher qualities which tend to be acquired most often by wealthier households.

Many people have been concerned about the effects of transracial adoptions on the ability of the adoptee to identify culturally and racially with its heritage. Because of these concerns, efforts have been made to avoid or reduce the numbers of transracial adoptions. Recent research has concluded, however, that in the case of transracial adoptions involving African-Americans, there is " concrete evidence for proving the occurrence of psychological harm to African-American children" (Alexander and Curtis 1996).

It is not unusual that alternatives develop when market forces are constrained by government policy. So it is with the parenthood rights to adoptable children. Private, foreign, and grey-market adoptions have all become increasingly commonplace over the past three decades. The growing practice of foreign adoptions has been a particularly strong response to shortages and low prices in industrialized countries (see Landers and Christensen 1987, Gubernick 1991b, and Ning 1992), leading some writers to worry about the extent to which the transactors are making informed decisions and not being exploited (Hermann and Kasper, 1992), though generally it is difficult to see how expansion of the choice set makes people worse off.

One final area of concern is the contractual agreement between adopting couples and another female for the latter to be artificially inseminated by the male of the adopting couple. This process, commonly referred to as "surrogate motherhood" has raised ethical questions, but the legal framework for the exchanges has evolved fairly quickly and explicitly. The emergence of this particular type of transaction can be ascribed almost entirely to shortages in the other markets for parenthood rights to children. Without those shortages, this supply response would not be so likely to be induced.

Market Evolution

The economic analysis of adoptions is a comparatively recent field of research. Serious shortages did not emerge until the late 1960s and early 1970s. Since then, there have been strong legal proscriptions on the use of markets to alleviate the shortages, but market forces have nevertheless had a strong influence on adoptions. Private adoptions, with large payments to intermediaries and to the biological parents, are commonplace; government-backed bounties are in place to encourage the adoption of children who would otherwise face a childhood of foster and group homes. Although markets will probably never become completely unfettered in this arena, market forces will continue to shape the evolution of the institutions that regulate the intermediation between buyers and sellers of the parenthood rights to children.

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