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Real options and demographic decisions: empirical evidence from East and West Germany

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  • Sumon Kumar Bhaumik
  • Jeffrey Nugent

Abstract

Iyer and Velu (2006) have convincingly argued that contemporary analyses of fertility behaviour fail to explain why a woman (or a couple) will choose to postpone childbirth, and in particular to consider the role of uncertainty in this regard. They have addressed this lacuna in the literature by using a real options approach to model fertility decisions by relating uncertainty experienced by individuals to the likelihood of childbirth. However, they did not present empirical evidence. Since the theory implies the existence of two offsetting effects of uncertainty on fertility decisions, a positive insurance effect and a negative option value effect, it is not easy to reject the theory on the basis of empirical analysis, when one of these effects offsets the other. We construct such a test for East (and also West) Germany during that country's reunification, which takes advantage of the fact that because of the country's strong welfare system, the insurance effect should be dominated by the option value effect, thereby suggesting that the net relationship should be negative. The results provide rather strong support for the real options link, especially for Eastern Germany.

Suggested Citation

  • Sumon Kumar Bhaumik & Jeffrey Nugent, 2011. "Real options and demographic decisions: empirical evidence from East and West Germany," Applied Economics, Taylor & Francis Journals, vol. 43(21), pages 2739-2749.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:21:p:2739-2749
    DOI: 10.1080/00036840903373287
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    References listed on IDEAS

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    1. Bonin, Holger & Euwals, Rob, 2001. "Participation Behavior of East German Women after German Unification," IZA Discussion Papers 413, Institute for the Study of Labor (IZA).
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    Cited by:

    1. Wolfgang Auer & Natalia Danzer & Anita Fichtl, 2015. "Ökonomische Unsicherheit: Befristete Verträge erschweren Familiengründung," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(18), pages 35-41, September.
    2. Prifti, Ervin & Vuri, Daniela, 2013. "Employment protection and fertility: Evidence from the 1990 Italian reform," Labour Economics, Elsevier, vol. 23(C), pages 77-88.
    3. Arnaud Chevalier & Olivier Marie, 2013. "Economic Uncertainty, Parental Selection, and the Criminal Activity of the "Children of the Wall"," SOEPpapers on Multidisciplinary Panel Data Research 605, DIW Berlin, The German Socio-Economic Panel (SOEP).
    4. Liepmann, Hannah, 2018. "The Impact of a Negative Labor Demand Shock On Fertility - Evidence From the Fall of the Berlin Wall," Rationality and Competition Discussion Paper Series 69, CRC TRR 190 Rationality and Competition.
    5. Hannah Liepmann, 2016. "The Impact of a Negative Labor Demand Shock on Fertility - Evidence from the Fall of the Berlin Wall," SFB 649 Discussion Papers SFB649DP2016-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    6. Chevalier A. & Marie O. & Marie O., 2013. "Economic uncertainty, parental selection, and the criminal activity of the ‘children of the wall’," Research Memorandum 066, Maastricht University, Graduate School of Business and Economics (GSBE).
    7. repec:oup:cesifo:v:62:y:2016:i:4:p:595-623. is not listed on IDEAS

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