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Habit Formation, Dynastic Altruism, and Population Dynamics

We study the general equilibrium properties of two growth models with overlapping generations, habit formation and endogenous fertility. In the neoclassical model, habits modify the economy's growth rate and generate transitional dynamics in fertility; station- ary income per capita is associated with either increasing or decreasing population and output, depending on the strength of habits. In the AK specification, growing population and increasing consumption per capita require that the habit coefficient lie within definite boundaries; outside the critical interval, positive growth is associated with either declining consumption due to overcrowding, or extinction paths with declining population. In both frameworks, habits reduce fertility: the trade-off between second-period consumption and spending for bequests prompts agents to decrease fertility in order to make parental altru- ism less costly. This mechanism suggests that status-dependent preferences may explain part of the decline in fertility rates observed in most developed economies.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 07/77.

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Length: 34 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:eth:wpswif:07-77
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