IDEAS home Printed from
   My bibliography  Save this paper

Fertility and Consumption when Having a Child is a Risky Investment


  • Gete, Pedro
  • Porchia, Paolo


In this paper we study a new factor that matters for fertility and consumption decisions: the risks associated with having and raising a child. We analyze a real options model with incomplete markets to explicitly model both children as a risky investment and the parental option to time fertility. We focus on CRRA preferences and uninsurable shocks to future parental income and to the costs of raising a child. We obtain several results that are new relative to the standard Beckerian fertility framework where children are deterministic goods: i) Independently of wealth, higher child cost volatility diminishes fertility. ii) Consumption is decreasing in higher cost volatility but the slope flattens as wealth increases. iii) Wealth alters the way in which the agent's risk tolerance impacts the fertility and consumption decisions. For low wealth levels, risk aversion speeds up fertility and lowers consumption with children serving as an utility insurance mechanism. iv) Fertility is increasing in the correlation between income and child cost shocks. v) The sign of this correlation determines if higher income volatility speeds up or delays fertility. vi) Fertility is U-shaped in the income over wealth ratio. Finally, we use regression analysis to provide empirical support for the theoretical results.

Suggested Citation

  • Gete, Pedro & Porchia, Paolo, 2010. "Fertility and Consumption when Having a Child is a Risky Investment," MPRA Paper 27885, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27885

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    File URL:
    File Function: revised version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Rajeev Dehejia & Adriana Lleras-Muney, 2004. "Booms, Busts, and Babies' Health," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1091-1130.
    2. Gary S. Becker & Kevin M. Murphy & Robert Tamura, 1994. "Human Capital, Fertility, and Economic Growth," NBER Chapters,in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 323-350 National Bureau of Economic Research, Inc.
    3. Sumon Kumar Bhaumik & Jeffrey B. Nugent, 2005. "Does Economic Uncertainty Affect the Decision to Bear Children? Evidence from East and West Germany," William Davidson Institute Working Papers Series wp788, William Davidson Institute at the University of Michigan.
    4. 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.
    5. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    6. Pedro Mira & Namkee Ahn, 2002. "A note on the changing relationship between fertility and female employment rates in developed countries," Journal of Population Economics, Springer;European Society for Population Economics, vol. 15(4), pages 667-682.
    7. Terry, Stephen J. & Knotek II, Edward S., 2011. "Markov-chain approximations of vector autoregressions: Application of general multivariate-normal integration techniques," Economics Letters, Elsevier, vol. 110(1), pages 4-6, January.
    8. Alicia Adsera, 2006. "An Economic Analysis of the Gap Between Desired and Actual Fertility: The Case of Spain," Review of Economics of the Household, Springer, vol. 4(1), pages 75-95, March.
    9. Emanuela Cardia & Serena Ng, 2003. "Intergenerational Time Transfers and Childcare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 431-454, April.
    10. Adsera, Alicia & Menendez, Alicia, 2009. "Fertility Changes in Latin America in the Context of Economic Uncertainty," IZA Discussion Papers 4019, Institute for the Study of Labor (IZA).
    11. Juan Carlos Conesa, 2002. "Educational attainment and timing of fertility decisions," Working Papers in Economics 78, Universitat de Barcelona. Espai de Recerca en Economia.
    12. Robert Tamura, 2000. "Growth, fertility and human capital: A survey," Spanish Economic Review, Springer;Spanish Economic Association, vol. 2(3), pages 183-229.
    13. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    14. José María Da Rocha & Luisa Fuster, 2006. "Why Are Fertility Rates And Female Employment Ratios Positively Correlated Across O.E.C.D. Countries?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1187-1222, November.
    15. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-871, September.
    16. Gary S. Becker, 1960. "An Economic Analysis of Fertility," NBER Chapters,in: Demographic and Economic Change in Developed Countries, pages 209-240 National Bureau of Economic Research, Inc.
    17. Michaela Kreyenfeld, 2005. "Economic uncertainty and fertility postponement: evidence from German panel data," MPIDR Working Papers WP-2005-034, Max Planck Institute for Demographic Research, Rostock, Germany.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Janina Reinkowski, 2014. "Empirical Essays in the Economics of Ageing and the Economics of Innovation," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 53, April.
    2. Wang, Ruixin, 2015. "Essays on development economics and public economics," Other publications TiSEM e1779514-5b71-4726-925b-2, Tilburg University, School of Economics and Management.
    3. Janina Reinkowski, 2013. "Should We Care that They Care? Grandchild Care and Its Impact on Grandparent Health," ifo Working Paper Series 165, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item


    Fertility; Consumption; Real Options; Incomplete Markets;

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • A10 - General Economics and Teaching - - General Economics - - - General
    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:27885. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.