Fertility and Consumption when Having a Child is a Risky Investment
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.
|Date of creation:||Dec 2010|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-871, September.
- Rajeev Dehejia & Adriana Lleras-Muney, 2004.
"Booms, Busts, and Babies' Health,"
250, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
- Gary S. Becker & Kevin M. Murphy & Robert Tamura, 1994.
"Human Capital, Fertility, and Economic Growth,"
in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 323-350
National Bureau of Economic Research, Inc.
- Gary S. Becker & Kevin M. Murphy & Robert Tamura, "undated". "Human Capital, Fertility, and Economic Growth," University of Chicago - Population Research Center 90-5a, Chicago - Population Research Center.
- Gary S. Becker & Kevin M. Murphy & Robert F. Tamura, 1990. "Human Capital, Fertility, and Economic Growth," NBER Working Papers 3414, National Bureau of Economic Research, Inc.
- Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
- 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.
- 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.
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)
If references are entirely missing, you can add them using this form.