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Risk Sharing, Inequality and Fertility

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15111.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15111

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  1. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
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  3. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Staff Report, Federal Reserve Bank of Minneapolis 293, Federal Reserve Bank of Minneapolis.
  4. Gary S. Becker & Robert J. Barro, 1986. "A Reformulation of the Economic Theory of Fertility," NBER Working Papers 1793, National Bureau of Economic Research, Inc.
  5. Larry Jones & Ali Shourideh & Roozbeh Hosseini, 2009. "Risk Sharing, Inequality and Fertility," 2009 Meeting Papers, Society for Economic Dynamics 153, Society for Economic Dynamics.
  6. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, Elsevier, vol. 51(2), pages 367-390, August.
  7. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  8. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  9. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 69-76, January.
  10. Larry E. Jones & Alice Schoonbroodt & Michèle Tertilt, 2008. "Fertility Theories: Can They Explain the Negative Fertility-Income Relationship?," NBER Working Papers 14266, National Bureau of Economic Research, Inc.
  11. Werning, Ivan & Farhi, Emmanuel, 2007. "Inequality and Social Discounting," Scholarly Articles 3451391, Harvard University Department of Economics.
  12. Stefania Albanesi & Christopher Sleet, 2006. "Dynamic Optimal Taxation with Private Information," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 1-30.
  13. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  14. Matthias Doepke & Robert M. Townsend, 2002. "Dynamic Mechanism Design With Hidden Income and Hidden Actions," UCLA Economics Working Papers, UCLA Department of Economics 818, UCLA Department of Economics.
  15. Christopher Phelan & Robert M Townsend, 2010. "Computing Multi-Period, Information Constrained Optima," Levine's Working Paper Archive 117, David K. Levine.
  16. Mikhail Golosov & Aleh Tsyvinski, 2006. "Optimal Taxation with Endogenous Insurance Markets," Levine's Bibliography 784828000000000445, UCLA Department of Economics.
  17. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Mechanisms," Econometrica, Econometric Society, Econometric Society, vol. 76(3), pages 619-641, 05.
  18. Fernando Alvarez, 1999. "Social Mobility: The Barro-Becker Children Meet the Laitner-Loury Dynasties," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 65-103, January.
  19. Christopher Sleet & Sevin Yeltekin, 2006. "Credibility and endogenous societal discounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 410-437, July.
  20. Phelan, Christopher, 1998. "On the Long Run Implications of Repeated Moral Hazard," Journal of Economic Theory, Elsevier, Elsevier, vol. 79(2), pages 174-191, April.
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Cited by:
  1. Larry Jones & Ali Shourideh & Roozbeh Hosseini, 2009. "Risk Sharing, Inequality and Fertility," 2009 Meeting Papers, Society for Economic Dynamics 153, Society for Economic Dynamics.
  2. Michele Tertilt, 2010. "Who Owns Children and Does it Matter?," Discussion Papers, Stanford Institute for Economic Policy Research 09-003, Stanford Institute for Economic Policy Research.

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