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Hidden Information Problems in the Design of Family Allowances

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  • Cigno, Alessandro

    () (University of Florence)

  • Luporini, Annalisa

    () (University of Florence)

  • Pettini, Anna

    () (University of Florence)

Abstract

We consider a case where some of the parents have higher ability to raise children than others. First-best policy gives both types of parents the same level of utility. If parental actions are not fully observable, however, the policy maker has to take into account the incentive-compatibility constraint that more able parents should not find it profitable to misrepresent their true ability by investing less in their children, and having a lower number of children. The second-best policy induces more able parents to have the first-best number of children, and to invest in each child at the first-best level. Less able parents are induced to have fewer children than in first best, and will underinvest in each child. Whether the government should subsidize more the more able parents, or the less able ones, depends on the properties of the cost function. In second best, however, less able parents will end up with lower utility than more able parents whatever the cost function.

Suggested Citation

  • Cigno, Alessandro & Luporini, Annalisa & Pettini, Anna, 2003. "Hidden Information Problems in the Design of Family Allowances," IZA Discussion Papers 790, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp790
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    References listed on IDEAS

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    3. Felix Büchel & Joachim R. Frick, 2004. "Immigrants in the UK and in West Germany –Relative income position, income portfolio, and redistribution effects," Journal of Population Economics, Springer;European Society for Population Economics, vol. 17(3), pages 553-581, August.
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    5. Vieira, José António Cabral & Cardoso, Ana Rute & Portela, Miguel, 2003. "Recruitment and Pay at the Establishment Level: Gender Segregation and the Wage Gap in Portugal," IZA Discussion Papers 789, Institute for the Study of Labor (IZA).
    6. Alessandro Cigno & Annalisa Luporini & Anna Pettini, 2004. "Hidden information problems in the design of family allowances," Journal of Population Economics, Springer;European Society for Population Economics, vol. 17(4), pages 645-655, December.
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    Cited by:

    1. Alessandro Cigno, 2010. "How to Avoid a Pension Crisis: A Question of Intelligent System Design ," CESifo Economic Studies, CESifo, vol. 56(1), pages 21-37, March.
    2. Honekamp, Ivonne, 2008. "Declining Fertility in Europe – An Economic Appraisal," MPRA Paper 15848, University Library of Munich, Germany, revised Mar 2008.
    3. Helmuth Cremer & Firouz Gahvari & Pierre Pestieau, 2008. "Pensions with heterogenous individuals and endogenous fertility," Journal of Population Economics, Springer;European Society for Population Economics, vol. 21(4), pages 961-981, October.
    4. Alessandro Cigno & Annalisa Luporini & Anna Pettini, 2004. "Hidden information problems in the design of family allowances," Journal of Population Economics, Springer;European Society for Population Economics, vol. 17(4), pages 645-655, December.
    5. Alessandro Cigno & Annalisa Luporini, 2011. "Optimal Family Policy in the Presence of Moral Hazard when the Quantity and Quality of Children are Stochastic," CESifo Economic Studies, CESifo, vol. 57(2), pages 349-364, June.
    6. Alessandro Cigno & Annalisa Luporini, 2006. "Optimal Policy Towards Families with Different Amounts of Social Capital, in the Presence of Asymmetric Information and Stochastic Fertility," CESifo Working Paper Series 1664, CESifo Group Munich.
    7. Bas Groezen & Lex Meijdam, 2008. "Growing old and staying young: population policy in an ageing closed economy," Journal of Population Economics, Springer;European Society for Population Economics, vol. 21(3), pages 573-588, July.
    8. Martin Werding, 2014. "Children are costly, but raising them may pay," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 30(8), pages 253-276, January.
    9. Luciano Fanti & Luca Gori, 2013. "Fertility-related pensions and cyclical instability," Journal of Population Economics, Springer;European Society for Population Economics, vol. 26(3), pages 1209-1232, July.

    More about this item

    Keywords

    optimal taxation; family allowances; parental ability; hidden information; agency problem;

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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