Non-Neutrality of Debt With Endogenous Fertility

Abstract

By DAVID E. WILDASIN* I. Introduction ALTHOUGH its full implications for a number of areas in economics have yet to be felt, the fact is that there is a great deal of evidence to suggest that fertility depends on economic variables, i.e., fertility is subject, at least in part, to choice. The purpose of this paper is to explore the consequences of this fact for the analysis of government policies involving intergenerational transfers. In particular, we investigate the Barro (1974) neutrality proposition on government debt, and the closely related question of the impact of an unfunded social security programme, in an economy with endogenous fertility. This exercise is useful for several reasons. First, underfunded social security programmes and substantial government borrowing are characteristic of many developed countries. The theoretical analysis below shows that such policies can be predicted (in a world of intergenerational altruism) to lower fertility. It may be necessary, therefore, to take these policies into account in analyzing the determinants of fertility in developed countries. Second, many authors have advocated the introduction or expansion of social security programmes as policies to curtail fertility in LDCs. The results of this paper provide a possible rationale for such arguments, although they also indicate that not all social security programs will have such effects. Third, our analysis demonstrates that the effects of government borrowing and social security on economic growth depend on the response of fertility to these policies. In analyses in which fertility is exogenously determined, all of the important dynamic consequences of a government policy are known once one can determine how the policy affects national savings: generally, an increase in national savings raises the capital/labour ratio, total output, output per head, and the wage rate, while reducing the return to capital. In an economy with endogenous fertility, by contrast, it is possible for variables measured in "total" terms (e.g., total output) to move in a direction opposite to the corresponding variables that represent per head magnitudes (e.g., output per head). As is shown below for a simple special case, it is quite possible for an increase in debt to cause * I am grateful to G. Stolnitz for introducing me to the study of social security and fertility. I have benefitted from comments on earlier versions of this paper, dating from April 1985, including those of P. Pestieau, P. J. N. Sinclair, R. J. Willis, seminar participants at Northwestern University, and two anonymous referees. I bear sole responsibility for the views in this paper, and for any possible errors or omissions. This paper was revised while visiting the Center for Operations Research and Econometrics at the Universit6 Catholique de Louvain and the Institut fur Gesellschafts-und Wirtschaftswissenschaften at the Universitat Bonn during 1986-87. I am very grateful to both for their hospitality and support, and to the Deutsche Forschungsgemeinschaft for suppor...

Intergenerational redistribution in a small open economy with endogenous fertility

“…This neutrality result contrasts with the findings of Lapan and Enders (1990) and Wildasin (1990). Getting to the same results as Raut concerning fertility and the capital-labor ratio, Ricardian equilvalence fails to hold and an increase in public debt (or PAYG) is welfare reducing.…”

The effects of financial markets and social security on saving and fertility behaviour in Italy

“…Those who wish to argue against this proposition tend to base their dissent on considerations such as a capital market imperfection, or imperfect forecasting. However, Becker and Barro (1988) and Wildasin (1990) have shown that government debt changes may have real effects, even with perfect markets and rational expectations, if fertility is endogenous. We have shown that, in the absence of altruism, public expenditure in the form of social security benefits has real effects even if there is no change in the public debt.…”

“…There are various versions of this model (see, for example, Becker and Barro 1988;Cigno 1991, Chap. 9), but the essential results can be derived from the simplified model used in Wildasin (1990), which assumes only two generations and compresses the lifetime of each of them in one period only. The present generation (that born at t = 1) will then maximize U 1 = U(cl,cZ, n) , (10) where c i is the lifetime consumption of generation i.…”

“…Assuming awarness that any unfunded rise in their pensions will have to be paid for by their children, parents will take account of the expected fall in T 2 partly by bequeathing more to each child, and partly also by having fewer children. As pointed out in Wildasin (1990), it is thus clear that the "neutrality of debt" proposition, put forward in Barro (1974) does not hold when fertility is endogenous: a debt-financed increase in current government expenditure will have real effects, because it will alter the intertemporal structure of incentives.…”

Endogenous fertility and the Henry George Theorem

“…There is an ever growing literature on endogenous demographic change (see, e.g., Mirrlees (1972), Pazner and Razin (1980), Nerlove et al (1984), Eckstein and Wolpin (1985), Cigno (1986), Lapan and Enders (1990), Wildasin (1990), Peters (1993) to mention only some of them). As far as normative aspects are concerned, this literature typically relies on the utility of the representative agent when population size is an additional object of the welfare analysis.…”