Fertility, Human Capital Accumulation, and the Pension System

42 Pages Posted: 6 Aug 2009

See all articles by Helmuth Cremer

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Firouz Gahvari

University of Illinois at Urbana-Champaign - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Pierre Pestieau

University of Liège - Research Center on Public and Population Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: July 1, 2009

Abstract

This paper provides a unified treatment of externalities associated with fertility and human capital accumulation as they relate to pension systems. It considers as overlapping generations model in which every generation consists of high earners and low earners with the proportion of types being determined endogenously. The number of children is deterministically chosen but the children’s future ability is in part stochastic, in part determined by the family background, and in part through education. In addition to the customary externality source associated with a change in average fertility rate, this setup highlights another externality source. This is due to the effect of a parent’s choice of number and educational attainment of his children on the proportion of high-ability individuals in the steady state. Our results include: (i) Investments in education of high- and low-ability parents must be subsidized, (ii) direct child subsidies to one or both parent types can be negative; i.e., they can be taxes, (iii) net subsidies to children (direct child subsidies plus education subsidies) to high-ability parents are always positive, and to low-ability parents can be positive or negative, (iv) either education subsidies or child subsidies, when used alone, can dominate the other instrument, (v) using child subsidy instruments alone entails a higher fertility rate and a lower ratio of high- to low-ability children, as compared to using education subsidies alone.

Keywords: pay-as-you-go social security, endogenous fertility, education, endogenous ratio of high to low ability types, three externality sources, education subsidies, child subsidies

JEL Classification: H55, J13

Suggested Citation

Cremer, Helmuth and Gahvari, Firouz and Pestieau, Pierre, Fertility, Human Capital Accumulation, and the Pension System (July 1, 2009). CESifo Working Paper Series No. 2736, Available at SSRN: https://ssrn.com/abstract=1443869

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Firouz Gahvari (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

313 David Kinley Hall, 1407 West Gregory Drive
Urbana, IL 61801
United States

HOME PAGE: http://www.economics.illinois.edu/people/fgahvari

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschingerstr. 5
Munich, DE-81679
Germany

Pierre Pestieau

University of Liège - Research Center on Public and Population Economics ( email )

Boulevard du Rectorat, 7, Batiment 31
Sart-Tilman
B-4000 Liege, 4000
Belgium
+32 4 366 3108 (Phone)
+32 4 366 3106 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Vopie Roman Pays
Louvain la Neuve
Belgium

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