Fertility and Consumption when Having a Child is a Risky Investment
AbstractIn this paper we study a new factor that matters for fertility and consumption decisions: the risks associated with having and raising a child. We analyze a real options model with incomplete markets to explicitly model both children as a risky investment and the parental option to time fertility. We focus on CRRA preferences and uninsurable shocks to future parental income and to the costs of raising a child. We obtain several results that are new relative to the standard Beckerian fertility framework where children are deterministic goods: i) Independently of wealth, higher child cost volatility diminishes fertility. ii) Consumption is decreasing in higher cost volatility but the slope flattens as wealth increases. iii) Wealth alters the way in which the agent's risk tolerance impacts the fertility and consumption decisions. For low wealth levels, risk aversion speeds up fertility and lowers consumption with children serving as an utility insurance mechanism. iv) Fertility is increasing in the correlation between income and child cost shocks. v) The sign of this correlation determines if higher income volatility speeds up or delays fertility. vi) Fertility is U-shaped in the income over wealth ratio. Finally, we use regression analysis to provide empirical support for the theoretical results.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 27885.
Date of creation: Dec 2010
Date of revision:
Fertility; Consumption; Real Options; Incomplete Markets;
Find related papers by JEL classification:
- D10 - Microeconomics - - Household Behavior - - - General
- A10 - General Economics and Teaching - - General Economics - - - General
- G00 - Financial Economics - - General - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-16 (All new papers)
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