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Hidden Information Problems in the Design of Family Allowances

  • Cigno, Alessandro


    (University of Florence)

  • Luporini, Annalisa


    (University of Florence)

  • Pettini, Anna


    (University of Florence)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 790.

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Length: 15 pages
Date of creation: Jun 2003
Date of revision:
Publication status: published in: Journal of Population Economics, 2004, 17 (4), 645-655
Handle: RePEc:iza:izadps:dp790
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  1. 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).
  2. Garibaldi, Pietro & Pacelli, Lia & Borgarello, Andrea, 2003. "Employment Protection Legislation and the Size of Firms," IZA Discussion Papers 787, Institute for the Study of Labor (IZA).
  3. Büchel, Felix & Frick, Joachim R., 2003. "Immigrants in the UK and in West Germany – Relative Income Position, Income Portfolio, and Redistribution Effects," IZA Discussion Papers 788, Institute for the Study of Labor (IZA).
  4. Peter R. Mueser & Kenneth R. Troske & Alexey Gorislavsky, 2007. "Using State Administrative Data to Measure Program Performance," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 761-783, November.
  5. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2003. "Fifty Years of Mincer Earnings Regressions," NBER Working Papers 9732, National Bureau of Economic Research, Inc.
  6. 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).
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