The Explosive Growth and Rapid Contraction of an Overlapping Generations Economy

This paper examines the long-term consequences of population decline in a quality-ladder endogenous growth framework. The key factor in fertility decisions is child-rearing costs, modeled as a convex function of labor productivity. As technology grows, the costs of raising children (including childbearing, childcare, and educational investments) increase disproportionately. While the economy may experience rapid growth in the early stages of development, it is likely to face sharp contractions in both population and innovation as child-rearing costs outpace the incentives for having children. We show that consistent population decay is almost inevitable. Nevertheless, a pronatalist policy can increase the likelihood of achieving high long-run labor productivity and living standards for future generations, although some short-run welfare deficits are to be expected.