Working Paper: CEPR ID: DP7653
Authors: Alice Schoonbroodt; Michèle Tertilt
Abstract: Is there an economic rationale for pronatalist policies? In this paper we propose and analyze a particular market failure that may lead to inefficiently low equilibrium fertility and therefore to a need for government intervention. The friction we investigate is related to the ownership of children. If parents have no claim on their children's income, then the private benefit from producing a child may be smaller than the social benefit. We present an overlapping-generations (OLG) model with fertility choice and altruism, and model ownership by introducing a minimum constraint on transfers from parents to children. Using the efficiency concepts proposed in Golosov, Jones and Tertilt (2007), we find that whenever the transfer floor is binding, fertility choices are inefficient. We show how this inefficiency relates to dynamic inefficiency in standard OLG models with exogenous fertility and Millian efficiency in models with endogenous fertility. In particular, we show that the usual conditions for efficiency are no longer sufficient. Further, we analyze several government policies in this context. We find that, in contrast to settings with exogenous fertility, a PAYG social security system cannot be used to implement the efficient allocation. Rather, government transfers need to be tied to a person's fertility choice in order to provide incentives for child bearing, thus providing a justification for pronatalist policies.
Keywords: efficiency; fertility; overlapping generations; social security
JEL Codes: D6; E1; H55; J13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| property rights over children's labor income (J13) | fertility choices (J13) |
| lack of ownership (H13) | underinvestment in childbearing (J13) |
| binding transfer floor (Y20) | inefficient fertility choices (J13) |
| absence of market for intertemporal trades (D52) | inefficiency in fertility choices (J13) |
| government policies (e.g., PAYG) linked to fertility choices (J18) | efficiency in fertility choices (J13) |