The Explosive Growth and Rapid Contraction of an Overlapping Generations Economy

This paper examines the long-term consequences of population decline in an endogenous growth framework with stochastic labor-augmenting technological progress. The key factor in fertility decisions is the cost of child-rearing, which is modeled as a convexfunction of labor productivity. As technology grows, the costs of raising children (including childbearing, childcare, and educational investments) increase disproportionately. While the economy may experience rapidgrowth in the early stagesof de velopment, it is likely to face sharp contractions in both population and innovation as child-rearing costs outpace the incentives for having children. We show that consistent population decay is almostinevitable. Nevertheless, a pronatalist policy can increase the likelihood of achieving high long-run labor productivity and living standards for future generations, although some short-run welfare deficits are to be expected.