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Fertility and Consumption when Having a Child is a Risky Investment

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  • Paolo Porchia

    (IE Business School)

  • Pedro Gete

    (Georgetown University)

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    Abstract

    In 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 Info

    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 563.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:563

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    1. Veloso, F.A., 2000. "Wealth Composition, Endogenous Fertility and the Dynamics of Income Inequality," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_7, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    2. Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," NBER Working Papers 14848, National Bureau of Economic Research, Inc.
    3. Emanuela Cardia & Serena Ng, 2003. "Intergenerational Time Transfers and Childcare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 431-454, April.
    4. Larry E. Jones & Alice Schoonbroodt & Michèle Tertilt, 2010. "Fertility Theories: Can They Explain the Negative Fertility-Income Relationship?," NBER Chapters, National Bureau of Economic Research, Inc, in: Demography and the Economy, pages 43-100 National Bureau of Economic Research, Inc.
    5. Kogan, Leonid & Uppal, Raman, 2002. "Risk Aversion and Optimal Portfolio Policies in Partial and General Equilibrium Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3306, C.E.P.R. Discussion Papers.
    6. Jianjun Miao & Neng Wang, 2007. "Investment, Consumption, and Hedging under Incomplete Markets," NBER Working Papers 13250, National Bureau of Economic Research, Inc.
    7. Michaela Kreyenfeld, 2005. "Economic uncertainty and fertility postponement: evidence from German panel data," MPIDR Working Papers WP-2005-034, Max Planck Institute for Demographic Research, Rostock, Germany.
    8. Gary S. Becker & Kevin M. Murphy & Robert Tamura, 1994. "Human Capital, Fertility, and Economic Growth," NBER Chapters, National Bureau of Economic Research, Inc, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 323-350 National Bureau of Economic Research, Inc.
    9. Hugonnier, Julien & Morellec, Erwan, 2007. "Corporate control and real investment in incomplete markets," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(5), pages 1781-1800, May.
    10. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, Elsevier, vol. 80(1), pages 123-129, July.
    11. Kremer, Michael & Chen, Daniel L, 2002. " Income Distribution Dynamics with Endogenous Fertility," Journal of Economic Growth, Springer, Springer, vol. 7(3), pages 227-58, September.
    12. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 859-71, September.
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    Cited by:
    1. Janina Reinkowski, 2013. "Should We Care that They Care? Grandchild Care and Its Impact on Grandparent Health," Ifo Working Paper Series Ifo Working Paper No. 165, Ifo Institute for Economic Research at the University of Munich.

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