Abstract
AbstractThis paper studies retirement and child support policies in a small, open, overlapping-generations economy with PAYG social security and endogenous retirement and fertility decisions. It demonstrates that neither fertility nor retirement choices necessarily coincide with socially optimal allocation, because agents do not take into account the externalities of fertility and the elderly labor supply in the economy as a whole. It shows that governments can realize the first-best allocation by introducing a child allowance scheme and a subsidy to incentivize the labor supply of older workers. As an alternative to subsidizing the elderly labor supply, we show that the first-best allocation can also be achieved by controlling the retirement age. Finally, the model is simulated in order to study whether the policies devoted to realizing the social optimum in a market economy could be a Pareto improvement.
Highlights
This paper studies a small, open, overlapping-generations model where the fertility rate and old agents’ labor supply are endogenously determined
This paper studies retirement and child support policies in a small, open, overlapping-generations economy with PAYG social security and endogenous retirement and fertility decisions
In order to study the impact of some of these government policies, a small, open, overlapping-generations economy is developed, characterized by a PAYG social security plan combined with retirement and fertility choices, both of which are endogenous
Summary
This paper studies a small, open, overlapping-generations model where the fertility rate and old agents’ labor supply are endogenously determined. Given that agents do not internalize the effect that their fertility and labor supply in old age decision may have on the economy, a decentralized equilibrium in this model is not necessarily socially optimal. One strand in the literature focuses on policies devoted to increasing fertility in order to ease the burden of demographic change. According to this literature, in a PAYG pension system, parents do not take into account the externalities produced by fertility and, this leads to a sub-optimal fertility rate. Fertility choices are associated with three social externalities: the intergenerational transfer effect, the child quality effect, and the capital dilution effect (Cipriani, 2014)
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