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On the dynamics of the age structure, dependency, and consumption

  • Heinrich Hock
  • David Weil


We examine the dynamic interaction of the population age structure, economic dependency, and fertility, paying particular attention to the role of intergenerational transfers. In the short run, a reduction in fertility produces a %u201Cdemographic dividend%u201D that allows for higher consumption. In the long run, however, higher old-age dependency can more than offset this effect. To analyze these dynamics we develop a highly tractable continuous-time overlapping generations model in which population is divided into three groups (young, working age, and old) and transitions between groups take place in a probabilistic fashion. We show that most highly developed countries have fertility below the rate that maximizes steady state consumption. Further, the dependency-minimizing response to increased longevity is to raise fertility. In the face of the high taxes required to support transfers to a growing aged population, we demonstrate that the actual response of fertility will likely be exactly the opposite, leading to increased population aging.

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Article provided by Springer in its journal Journal of Population Economics.

Volume (Year): 25 (2012)
Issue (Month): 3 (July)
Pages: 1019-1043

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Handle: RePEc:spr:jopoec:v:25:y:2012:i:3:p:1019-1043
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