Fertility and Consumption When Having a Child is a Risky Investment
Georgetown University; IE Business School
IE Business School
October 11, 2011
This paper studies children as a risky asset associated to an investment option. Children provide utility but have a stochastic maintenance cost. We obtain several new results relative to models where children are deterministic goods, among which: i) Higher child risks diminish fertility and consumption. ii) Risk aversion speeds up fertility as households use the safe utility derived from a child as insurance against fluctuations in consumption. iii) Fertility is increasing in the correlation between income and child cost shocks. The household is reluctant to have children when positive cost shocks come together with bad income shocks. The opposite result happens when children hedge income shocks. iv) The sign of the correlation determines whether higher income volatility speeds up or delays fertility.
Number of Pages in PDF File: 27working papers series
Date posted: January 15, 2011 ; Last revised: October 12, 2011
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