Property Rights and Efficiency in OLG Models with Endogenous Fertility

by Alice Schoonbroodt and Michèle Tertilt
Journal of Economic Theory, Volume 150, March 2014, pp. 551-582 


Is there an economic rationale for pronatalist policies? We propose and analyze a particular market failure that leads to inefficiently low fertility in equilibrium. The friction is caused by the lack of ownership of children: if parents have no claim on their children’s income, the private benefit from producing a child can be smaller than the social benefit. We analyze an overlapping-generations (OLG) model with fertility choice and parental altruism. Ownership is modeled as a minimum constraint on transfers from parents to children. Using the efficiency con- cepts proposed in Golosov, Jones, and Tertilt (2007), we find that whenever the transfer floor is binding, fertility choices are inefficient. Second, we show that the usual conditions for efficiency are not sufficient in this context. Third, in contrast to settings with exogenous fertility, a PAYG social security system cannot be used to implement efficient allocations. To achieve an efficient outcome, government transfers need to be tied to fertility choice. 

                Univ. of Southampton, Discussion Papers in Economics and Econometrics, DP 1020
                (Earlier version, entitled "Who owns children, and does it matter?" NBER WP w15663)

  author = {Alice Schoonbroodt and Mich\`{e}le Tertilt},
  title = {Property Rights and Efficiency in OLG Models with Endogenous Fertility},
  journal = {Journal of Economic Theory},
  year = {2014}, 
  month = {March},  
  volume = {150}, 
  pages = {551-582},