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Risk Sharing, Inequality and Fertility

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  • Larry Jones

    (Univeristy of Minnesota)

  • Ali Shourideh

    (University of Minnesota)

  • Roozbeh Hosseini

    (Arizona State Univeristy)

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 Society for Economic Dynamics in its series 2009 Meeting Papers with number 153.

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Date of creation: 2009
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Handle: RePEc:red:sed009:153

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  1. Mikhail Golosov & Aleh Tsyvinski, 2004. "Designing Optimal Disability Insurance: A Case for Asset Testing," NBER Working Papers 10792, National Bureau of Economic Research, Inc.
  2. 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.
  3. Christopher Phelan & Robert M Townsend, 2010. "Computing Multi-Period, Information Constrained Optima," Levine's Working Paper Archive 117, David K. Levine.
  4. Larry E. Jones & Ali Shourideh & Roozbeh Hosseini, 2010. "Risk Sharing, Inequality, and Fertility," 2010 Meeting Papers 948, Society for Economic Dynamics.
  5. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
  6. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  7. Doepke, Matthias & Townsend, Robert M, 2004. "Dynamic Mechanism Design with Hidden Income and Hidden Auctions," CEPR Discussion Papers 4455, C.E.P.R. Discussion Papers.
  8. Mikhail Golosov, 2007. "Optimal Taxation With Endogenous Insurance Markets," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 487-534, 05.
  9. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 569-587, 07.
  10. Emmanuel Farhi & Iván Werning, 2007. "Inequality and Social Discounting," Journal of Political Economy, University of Chicago Press, vol. 115, pages 365-402.
  11. Khan, A. & Ravikumar, B., 1997. "Growth and Risk-Sharing with Private Information," Working Papers 97-13, University of Iowa, Department of Economics.
  12. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Mechanisms," Econometrica, Econometric Society, vol. 76(3), pages 619-641, 05.
  13. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  14. Phelan, Christopher, 1998. "On the Long Run Implications of Repeated Moral Hazard," Journal of Economic Theory, Elsevier, vol. 79(2), pages 174-191, April.
  15. Gary S. Becker & Robert J. Barro, . "A Reformulation of the Economic Theory of Fertility," University of Chicago - Population Research Center 85-11, Chicago - Population Research Center.
  16. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  17. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  18. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  19. Christopher Sleet & Sevin Yeltekin, 2006. "Credibility and endogenous societal discounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 410-437, July.
  20. 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, vol. 2(1), pages 65-103, January.
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Cited by:
  1. Larry Jones & Ali Shourideh & Roozbeh Hosseini, 2009. "Risk Sharing, Inequality and Fertility," 2009 Meeting Papers 153, Society for Economic Dynamics.
  2. Alice Schoonbroodt & Michèle Tertilt, 2010. "Who Owns Children and Does it Matter?," NBER Working Papers 15663, National Bureau of Economic Research, Inc.

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