Intergenerational transfers and fertility: Trade-off between human capital and child labour

Abstract

This paper analyzes the relationship between demographic transition and intergenerational transfers using an overlapping generations model with endogenous fertility. In particular, this paper considers a growth model in which the young generation confronts a trade-off between an education for human capital accumulation and child labour. At low levels of human capital, both the fertility rate and income transfers from children to parents are at high levels, because the opportunity cost of child rearing is low, and the wages of child labour are important for household income with low parental labour wages. An increase in the human capital decreases the fertility rate and reverses the income transfers to the opposite direction from parents to children. Thus, we demonstrate the significant relationship between demographic transition and intergenerational transfers. We also demonstrate the possibility of multiple equilibria in the form of a poverty trap equilibrium with a low human capital level and a steady state with a high human capital level.