Working Paper: NBER ID: w15111
Authors: Roozbeh Hosseini; Larry E. Jones; Ali Shourideh
Abstract: We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property - whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents' objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size.
Keywords: risk sharing; inequality; fertility; social insurance; public finance
JEL Codes: C61; D30; D63; D64; H21; H23; H43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor productivity shocks (J49) | family size (J12) |
| continuation utility (Y20) | consumption decisions (D12) |
| continuation utility (Y20) | fertility decisions (J13) |
| high productivity shocks (O49) | continuation utility (Y20) |
| endogenous fertility (J19) | optimal allocations (D61) |
| optimal allocations (D61) | prevention of immiseration (J68) |
| continuation utility resets (L97) | long-run distribution of utility (D39) |
| socially efficient allocation (D61) | negative income-fertility relationship (J19) |