Fertility and consumption when having a child is a risky investment

Gete, Pedro and Porchia, Paolo (2010): Fertility and consumption when having a child is a risky investment.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fertility, Consumption, Real Options, Incomplete Markets
• Subjects: J - Labor and Demographic Economics > J1 - Demographic Economics > J13 - Fertility ; Family Planning ; Child Care ; Children ; Youth; J - Labor and Demographic Economics > J1 - Demographic Economics > J12 - Marriage ; Marital Dissolution ; Family Structure ; Domestic Abuse; A - General Economics and Teaching > A1 - General Economics > A10 - General; G - Financial Economics > G0 - General > G00 - General; J - Labor and Demographic Economics > J1 - Demographic Economics > J11 - Demographic Trends, Macroeconomic Effects, and Forecasts; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; J - Labor and Demographic Economics > J1 - Demographic Economics > J10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; D - Microeconomics > D1 - Household Behavior and Family Economics > D10 - General; G - Financial Economics > G1 - General Financial Markets > G10 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General

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