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PUBLIC FINANCE/FINANCES PUBLIQUES. 1993; 48, Suppl.:29-42.This paper develops an intertemporal simulation model capable of addressing the macroeconomic and distributional effects of demographic shocks in a small open economy. Two sources of population aging are examined, viz. lower birth rates and prolonged expected lifetimes at retirement age. Due to strong expectational effects, both shocks are found to change average consumption in a downward direction, in the short run as well as in the long run. This effect is matched by a strong net acquisition of foreign assets. Furthermore, it turns out that the intergenerational distribution of the burden of adjusting to an aging population is strongly dependent on whether the benefit rate, the contribution rate, or the relative non-capital income of pensioners and workers is held fixed. (EXCERPT)
[Unpublished] 1985. Presented at the Annual Meeting of the Population Association of America, Boston, Massachusetts, March 28-30, 1985. 36 p.Important questions of theory and policy turn on the measurement of intergenerational transfers and determination of their net direction and magnitude, yet no serious effort has been made to estimate these. This discussion shows that when the conceptual issues are clarified, it is possible to draw on existing data and research to quantify the transfers, establish their net direction, and evaluate the externalities to childbearing arising from transfers. Samuelson anticipated that increased fertility would lead to large positive benefits from intergenerational transfers, on the assumption that children's consumption could be ignored. Arthur-Micnicoll though that effects would be substantially negative when children's costs were included in the reckoning. Without explicit guidance one might choose the average expenditure per child in a 2 child family, or the average expenditure on the 3rd child. These differ importantly. The first is about 30% more than the third, while the second is about .67 of the third; the first and second differ by a factor of two. The setup used by Arthur-McNicoll and by Lee required that the average and marginal costs be equal, and satisfaction of accounting identities would require that the first concept be used. Analysis revealed that none of these three is totally apporpriate, but that the third is most nearly so. The correct procedure is to use the third concept for the within household effect, and for the between household effect to use household consumption by age of head, which implicitly reflects any influence that number and age of children actually have on household consumption. When this is done, it is possible to measure, at least approximately, the transfer effects of more rapid growth, and the externalities to childbearing to which they give rise. The results indicate that the net direction of transfers is from the younger to older ages. A 1% increase in the population growth rate now leads to a 4.4% increase in life cycle consumption. Taking the results at face value, there are net upward transfers in the US, particularly if attention is restricted to between household transfers.
Journal of Political Economy. 1984 Jun; 92(3):527-31.This note considers the problem of a utility maximizing family when utility depends on own consumption, number of children, and indirectly, on children's welfare through the bequests parents make. A novel feature of the approach is that the welfare of a child's own family depends on the bequest of both the child and the child's spouse. Due to the fact that each family derives utility from the bequests of other families through marriages, Pareto optimality can be attained only if parents are free to bargain with each other about what each child's family will leave to its children. In modern times, when so much of parents' bequests is in the form of human capital, property rights such as these are difficult or impossible to enforce and marriages are not "arranged" in this manner by parents. If the children are free to choose and marry for reasons unrelated to bequests, and if bequests are determined before the choice, then it will be shown that the level of bequests will also be less than a symmetric Pareto optimal allocation. It is also shown that under a suitable separability assumption, the number of children each family bears is larger than a symmetric Pareto optimal allocation. It is emphasized that only the question of allocative efficiency among members of the 1st generation (parents) is considered, that is, the social welfare is the individual parent's and the children enter only through their parents' utility functions. Under the assumption of weak separability of bequests in the parents' utility function from family consumption and number of children, the less than optimal level of bequests is associated with too large a rate of population growth. The concern here is only with market failure due to the potential externality introduced by bequests. The optimal population size and level of bequests under alternative social welfare functions are considered elsewhere. The externality identified here applies not only to bequests in the form of physical captial but, expecially, to bequests in the form of investments in the human capital of children. It is the latter that effectively prevent establishment of a system of property rights of parents in children that would eliminate the externality.