The effectiveness of child policies to boost child quality and quantity in the PAYG pension system

This paper constructs an overlapping generations model to examine the effects of child policies and explore the policy design regarding policy support and the policy mix. We find that child allowances and educational subsidies have opposing effects on fertility and human capital growth, but they all have an inverted U-shaped relationship with pay-as-you-go pensions. With an appropriate adjustment in the policy mix, raising policy support could boost child quality and quantity and increase pensions in a competitive economy. Additionally, we contrast public and private educational subsidies and find that public educational subsidies are more effective when the policy mix emphasizes child allowances, whereas private educational subsidies perform better when the government increases policy support. We further extend our analysis to a social planner’s allocation and find that social welfare can be maximized by appropriately setting the two policy instruments, whereas the policy design in a competitive economy cannot achieve maximum social welfare.