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Stochastic Fertility, Moral Hazard, and the Design of Pay-As-You-Go Pension Plans

  • Helmuth Cremer
  • Firouz Gahvari
  • Pierre Pestieau

This article models a two-period overlapping generations economy in the steady state where the realization of the quantity-quality number of children depends on an initial investment in children and on a random shock. It shows that the implementation of the first-best allocation, in which the effort level is publicly observable, requires a subsidy on the investment in children. There should also be full insurance with respect to second-period consumption and pensions must be invariant to the number of children. On the other hand, when investment is unobservable and one cannot subsidize it, the full insurance property goes away. In this case, pensions must be linked positively to the number of children. (JEL codes: H55, J13) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email:, Oxford University Press.

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Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 57 (2011)
Issue (Month): 2 (June)
Pages: 332-348

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Handle: RePEc:oup:cesifo:v:57:y:2011:i:2:p:332-348
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