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Risk sharing, inequality, and fertility

  • Roozbeh Hosseini
  • Larry E. Jones
  • Ali Shourideh

We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property - whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents' objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 674.

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Date of creation: 2009
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Handle: RePEc:fip:fedmwp:674
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  1. Gary S. Becker & Robert J. Barro, 1986. "A Reformulation of the Economic Theory of Fertility," NBER Working Papers 1793, National Bureau of Economic Research, Inc.
  2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  3. Phelan, Christopher, 1998. "On the Long Run Implications of Repeated Moral Hazard," Journal of Economic Theory, Elsevier, vol. 79(2), pages 174-191, April.
  4. Phelan, Christopher & Townsend, Robert M, 1991. "Computing Multi-period, Information-Constrained Optima," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 853-81, October.
  5. Mikhail Golosov & Narayana R. Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Working Papers 615, Federal Reserve Bank of Minneapolis.
  6. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  7. Christopher Sleet & Sevin Yeltekin, 2006. "Credibility and endogenous societal discounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 410-437, July.
  8. Tsyvinski, A. & Golosov, M., 2004. "Optimal Taxation with Endogenous Insurance Markets," 2004 Meeting Papers 124, Society for Economic Dynamics.
  9. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  10. Larry Jones & Ali Shourideh & Roozbeh Hosseini, 2009. "Risk Sharing, Inequality and Fertility," 2009 Meeting Papers 153, Society for Economic Dynamics.
  11. Doepke, Matthias & Townsend, Robert M., 2006. "Dynamic mechanism design with hidden income and hidden actions," Journal of Economic Theory, Elsevier, vol. 126(1), pages 235-285, January.
  12. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  13. Fernando Alvarez, 1999. "Social Mobility: The Barro-Becker Children Meet the Laitner-Loury Dynasties," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 65-103, January.
  14. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  15. Khan, Aubhik & Ravikumar, B., 2001. "Growth and risk-sharing with private information," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 499-521, June.
  16. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
  17. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  18. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Mechanisms," Econometrica, Econometric Society, vol. 76(3), pages 619-641, 05.
  19. Emmanuel Farhi & Iván Werning, 2007. "Inequality and Social Discounting," Journal of Political Economy, University of Chicago Press, vol. 115, pages 365-402.
  20. Larry E. Jones & Alice Schoonbroodt & Michèle Tertilt, 2010. "Fertility Theories: Can They Explain the Negative Fertility-Income Relationship?," NBER Chapters, in: Demography and the Economy, pages 43-100 National Bureau of Economic Research, Inc.
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