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Fertility-related pensions and cyclical instability

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  • Luciano Fanti

    ()

  • Luca Gori

    ()

Abstract

In this paper, we study a general equilibrium model with overlapping generations, endogenous fertility and public pensions. By assuming Cobb–Douglas technology and logarithmic preferences, we show that the introduction of a fertility-related component in the pay-as-you-go pension scheme may destabilise the long-term equilibrium and cause endogenous fluctuations when individuals have static expectations. The possibility of cyclical instability increases (resp. reduces) when both the subjective discount factor and relative weight of individual fertility in pay-as-you-go pensions (resp. the parents’ taste for children) increase(s). Interestingly, when public pensions are contingent on the individual number of children, the financing of small-sized benefits may cause the occurrence of a flip bifurcation, two-period cycles and cycles of a higher order. In addition, we show through numerical simulations that these results hold in a more general setting with a constant inter-temporal elasticity of substitution utility function and a constant elasticity of substitution production function. Our findings identify a possible novel factor responsible for persistent deterministic fluctuations in a context of overlapping generations, while also representing a policy warning regarding the destabilising effects of fertility-related pension reforms, which are currently high in both the theoretical debate and the political agendas of several developed countries. Copyright Springer-Verlag Berlin Heidelberg 2013

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Bibliographic Info

Article provided by Springer in its journal Journal of Population Economics.

Volume (Year): 26 (2013)
Issue (Month): 3 (July)
Pages: 1209-1232

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Handle: RePEc:spr:jopoec:v:26:y:2013:i:3:p:1209-1232

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Related research

Keywords: Endogenous fertility; Fertility-related pensions; Static expectations; OLG model; C62; H55; J14; J18; J26;

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Cited by:
  1. Fanti, Luciano & Gori, Luca, 2010. "Endogenous fertility, endogenous lifetime and economic growth: the role of child policies," MPRA Paper 26146, University Library of Munich, Germany.
  2. Luciano Fanti & Luca Gori, 2014. "An OLG model of growth with longevity: when grandparents take care of grandchildren," Portuguese Economic Journal, Springer, vol. 13(1), pages 39-51, April.

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