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Property rights and efficiency in OLG models with endogenous fertility

  • Schoonbroodt, Alice
  • Tertilt, Michele

Is there an economic rationale for pronatalist policies? We propose and analyze a particular market failure that leads to inefficiently low fertility in equilibrium. The friction is caused by the lack of ownership of children: if parents have no claim on their children’s income, the private benefit from producing a child can be smaller than the social benefit. We analyze an overlapping-generations model with fertility choice and parental altruism. Ownership is modeled as a minimum constraint on transfers from parents to children. Using the efficiency concepts proposed in Golosov, Jones, and Tertilt (2007), we find that whenever the transfer floor is binding, fertility choices are inefficient. Second, we show that the usual conditions for efficiency are not sufficient in this context. Third, in contrast to settings with exogenous fertility, a PAYG social security system cannot be used to implement efficient allocations. To achieve an efficient outcome, government transfers need to be tied to fertility choice. Keywords; overlapping generations, fertility, efficiency

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 1020.

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Date of creation: 01 Dec 2010
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Handle: RePEc:stn:sotoec:1020
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