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The optimal fiscal policy in a OLG model with endogenous fertility

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  • Luciano fanti
  • Luca Spataro

Abstract

In this paper we show that, when endogenous fertility choices are accounted for, the traditional rule provided by Diamond (1965) should be amended in order to effectively implement the first best allocation of an OLG economy, even in the presence a non distortionary tax for financing national debt. With Cobb-Douglas preferences and fixed costs for rearing children, it turns out that the implementable equilibrium is in general suboptimal and dynamically inefficient (i.e. with overaccumulation of physical capital). The reason for this result is that, when fertility choices are taken as endogenous, a further policy instrument is necessary for controlling it: in this respect, by combining a lump sum tax upon the young adult with a subsidy for each child or with a lump sum trasfer to the old, the first best allocation can be implemented.

Suggested Citation

  • Luciano fanti & Luca Spataro, 2004. "The optimal fiscal policy in a OLG model with endogenous fertility," Discussion Papers 2004/36, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  • Handle: RePEc:pie:dsedps:2004/36
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    File URL: http://www.ec.unipi.it/documents/Ricerca/papers/2004-36.pdf
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    Cited by:

    1. Marco Guerrazzi, 2005. "Notes on Continuous Dynamic Models: the Benhabib-Farmer Condition for Indeterminacy," Discussion Papers 2005/54, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    2. Maurizio Lisciandra, 2007. "The Role of Reciprocating Behaviour in Contract Choice," Discussion Papers 2007/65, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

    More about this item

    Keywords

    Overlapping Generations; endogenous fertility; dynamic inefficiency; debt;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth

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