Demographics, Immigration, and Market Size

This paper constructs an overlapping generations model wherein people decide their number of children and levels of consumption for di¤erentiated goods. We further assume that immigration takes place according to the utility di¤erence between inside and outside a country. We show that an improvement in longevity has three e¤ects on the market size and welfare: First, it decreases the number of children. Second, it increases the per capita expenditure on consumption. Finally, it increases immigration. The rst e¤ect has negative impacts on the market size and welfare whereas the latter two e¤ects have positive impacts. We then calibrate our model to match Japanese and U.S. data from 1955 to 2014 and nd that the negative e¤ects dominate the positive ones. Moreover, our counterfactual analyses show that accepting immigration in Japan can be useful in overcoming population and market shrinkage caused by an aging population.