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Hidden information problems in the design of family allowances

  • Alessandro Cigno

    ()

  • Annalisa Luporini

    ()

  • Anna Pettini

    ()

We consider the optimal determination of family allowances in a model where some of the parents have higher ability to raise children than others. First-best policy gives both types of parents the same level of utility. If neither parental ability nor parental actions are fully observable, however, the policy maker has to take into account the incentive-compatibility constraint that more able parents should not find it profitable to mis-represent their true ability by investing less in their children, and having a lower number of children. The second-best policy induces more able parents to have the first-best number of children, and to invest in each child at the first-best level. Less able parents are induced to have fewer children than in first best, and will underinvest in each child. Whether the government should subsidize more the more able parents, or the less able ones, depends on the properties of the cost function. In second best, however, less able parents will end up with lower utility than more able parents whatever the cost function. Copyright Springer-Verlag 2004

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File URL: http://hdl.handle.net/10.1007/s00148-003-0169-7
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Article provided by Springer in its journal Population Economics.

Volume (Year): 17 (2004)
Issue (Month): 4 (December)
Pages: 645-655

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Handle: RePEc:spr:jopoec:v:17:y:2004:i:4:p:645-655
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  1. Cigno, Alessandro & Luporini, Annalisa & Pettini, Anna, 2003. "Hidden Information Problems in the Design of Family Allowances," IZA Discussion Papers 790, Institute for the Study of Labor (IZA).
  2. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2003. "Fifty Years of Mincer Earnings Regressions," NBER Working Papers 9732, National Bureau of Economic Research, Inc.
  3. Pietro Garibaldi & Lia Pacelli & Andrea Borgarello, 2003. "Employment Protection Legislation and the Size of Firms," Working Papers 247, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Peter R. Mueser & Kenneth R. Troske & Alexey Gorislavsky, 2007. "Using State Administrative Data to Measure Program Performance," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 761-783, November.
  5. Vieira, José António Cabral & Cardoso, Ana Rute & Portela, Miguel, 2003. "Recruitment and Pay at the Establishment Level: Gender Segregation and the Wage Gap in Portugal," IZA Discussion Papers 789, Institute for the Study of Labor (IZA).
  6. Felix Büchel & Joachim R. Frick, 2004. "Immigrants in the UK and in West Germany –Relative income position, income portfolio, and redistribution effects," Journal of Population Economics, Springer, vol. 17(3), pages 553-581, 08.
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