The Empathy Channel in Fertility

Being around babies makes people want babies. We formalize this observation as the empathy channel: exposure to infants in the social environment activates neurobiological mechanisms that increase the desire for parenthood. As children become scarcer, this affective stimulus weakens, further eroding the motivation to have children. We embed the mechanism in a two-group overlapping-generations quantity-quality model. The empathy channel generates a positive externality, since each birth raises others’ desire for children, making the decentralized equilibrium inefficient. We characterize the optimal per-child subsidy and show that the first-order Pigouvian rate substantially overshoots the general-equilibrium optimum. The optimal targeting rule follows a Ramsey-like logic, directing the subsidy at the group with the most externality per fiscal dollar, not the group with the largest externality per child. The calibrated model suggests that the empathy channel can account for 3–33% of the fertility decline, with 13.4% at the baseline. At this baseline, the Pigouvian overshoot is 23–32% and the optimal subsidy raises welfare by 0.22% in consumption-equivalent terms.