Fertility and Consumption When Having a Child is a Risky Investment
Georgetown University; IE Business School
IE Business School
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.
Number of Pages in PDF File: 27
Date posted: January 15, 2011 ; Last revised: August 28, 2014