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Fertility and Consumption When Having a Child is a Risky Investment

27 Pages Posted: 15 Jan 2011 Last revised: 28 Aug 2014

Pedro Gete

Georgetown University; IE Business School

Paolo Porchia

IE Business School

Date Written: August 2014

Abstract

This paper analyzes fertility and consumption decisions when the costs of raising a child and parents' income are stochastic and correlated. We model the decision to have a child similarly to the decision to exercise an option in finance literature. We obtain several new results relative to models where children are deterministic goods and only income and substitution effects drive fertility. For example, 1) Higher child risks diminish fertility and consumption. 2) Fertility is increasing in the correlation between income and child cost shocks. 3) The sign of the correlation determines whether higher income volatility speeds up or delays fertility.

Suggested Citation

Gete, Pedro and Porchia, Paolo, Fertility and Consumption When Having a Child is a Risky Investment (August 2014). Available at SSRN: https://ssrn.com/abstract=1735042 or http://dx.doi.org/10.2139/ssrn.1735042

Pedro Gete (Contact Author)

Georgetown University ( email )

ICC 580
37th and O Sts., NW
Washington, DC 20057
United States

HOME PAGE: http://www9.georgetown.edu/faculty/pg252/

IE Business School

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

Paolo Porchia

IE Business School ( email )

Serrano 99
Madrid, 28006
Spain
+34917821706 (Phone)
+34 91 745 47 62 (Fax)

HOME PAGE: http://paolo-porchia.profesores.ie.edu/

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