Fertility under Income Uncertainty: The Role of Education Subsidies

Empirical studies suggest that income uncertainty depresses fertility, yet its policy im plications remain underexplored. This paper shows that income-tested education subsidies provide insurance against income risk for households with children, mitigating the negative effects of income uncertainty on fertility. I build and calibrate an incomplete-market general equilibrium lifecycle model with fertility and college enrollment choices, in which altruistic parents make asset transfers to support their children’s college education. Having more children increases the risk that parents may be unable to finance their children’s education after bad income shocks or, if they do finance it, must endure substantially lower lifetime consumption. This mechanism discourages fertility under income uncertainty and generates the observed negative relationship between income risk and fertility. Counterfactual exper iments show that income-tested college subsidies insure households against these risks by reducing education costs contingent on bad income shocks. The resulting fertility responses amplify the aggregate effects of the subsidy, including increases in educational attainment and intergenerational mobility.