Who Owns Children and Does It Matter?

Transcription

1 1 / 35 Who Owns Children and Does It Matter? Alice Schoonbroodt 1 Michèle Tertilt 2 1 University of Southampton 2 Stanford University Lecture Econ 6017, April-May 2009

2 What we do 1. Parents have lost rights over children s labor income. 2. Explore implications in theoretical model: OLG with altruistic fertility choice: Fertility decreases as parents loose rights (positive). Fertility may be inefficiently low (normative). Policy implications PAYG pensions Fertility dependent PAYG pensions? Fertility subsidy and Government debt? 3. Conclusion and what s next 2 / 35

3 Who owns children s labor income? Who can legally (and feasibly) make decisions about a child as a resource? the parents? the child? the government? Clearly a child cannot decide to be born. Laws and cultural norms determine parent s control over children; mandatory parental support; allocation of power between generations. We document historical shift in rights from parents to children (U.S., U.K., France & Spain) 3 / 35

4 4 / 35 Shift in Rights over Children (Children s Income) Pre-1900: Mandatory parental support: Poor Law Act 1601 Code Napoléon, Art Indirect control: Corporal punishment/ physical cruelty legal. Patria potestad and lettres de cachet. Indenture of children legal. Parental consent required for marriage, medical,... Parents own children s income 20th Century: Laws revoked/weaker. Abused children removed from parents. Age of majority decreased. Banned child labor. Parental consent not required. Children own their income histdetails

5 5 / 35 Theoretical Set-Up Parent chooses fertility & overlaps with productive children; Children are costly, but provide direct utility benefits. Focus: Two-period model; Focus: Fixed interest rate and wages. Results generalize to General equilibrium Infinite horizon Educational investment Multiple dynasties/heterogeneity

6 6 / 35 A Simple Two-Period Model Parent s Decision Problem max {c m,c o,n,b,s} s.t. u(c m ) + βu(c o ) + γu(n) + ζu(c k ) c m + θn + s w m c o + nb Rs c k w k + b b b b can be interpreted as property rights: b = b = 0 parents own children s income children own their own income

7 7 / 35 Costs and Benefits of Child-rearing [ γu (n) = u (c m ) θ + b ] R The higher b, the more likely constraint is binding increases cost of children. Distorts incentive to have children.

8 7 / 35 Costs and Benefits of Child-rearing [ γu (n) = u (c m ) θ + b ] R The higher b, the more likely constraint is binding increases cost of children. Distorts incentive to have children. Equalizing intergenerational MU: βu (c o )n = ζu (c k ) + λ b λ b : how far off most preferred allocation?

9 Solution with non-binding constraint b = Assume: γ > ζ > 0, Rθ > w k, u( ) = log( ). Note: n = (γ ζ)[rw m ] (β + γ + 1)[Rθ w k ] b = ζrθ w k γ (γ ζ) b may be negative even with altruism. Especially if ζ small, γ large, or w k high. Suggests that even altruistic parents want to steal from their children in many circumstances. heterog 8 / 35

10 9 / 35 Solution with binding constraint b < b ˆn = ˆb = b γrw m (1 + γ + β)(rθ + b) Result: Optimal fertility decreases in b. heterog

11 U.S. Total Fertility Rate 8 7 TFR (Haines (1994)) Total Fertility Rate Year Property rights shift may have contributed to fertility decline. heterog 10 / 35

12 11 / 35 Efficiency Results and Coase s Theorem Coase s Theorem Property rights don t matter for efficiency of allocation if bargaining is possible. Our results 1. When parents own children, costs and benefits of having children borne by same people: parents. equilibrium fertility is efficient 2. When parents don t own children, costs and benefits of having children borne by different people. Parents bear cost, children reap benefits. equilibrium fertility not efficient 3. Unborn children cannot write contract with parents when property rights are assigned to them by law.

13 Policy Implications 1. An Application: Property rights and the introduction of Standard PAYG pensions May generate baby boom and bust cycle; Does not lead to efficiency. 2. Alternative I: Fertility dependent PAYG pensions? 3. Alternative II: Fertility subsidy and Government debt? 12 / 35

14 13 / 35 An Application? Many rights for children introduced at the end of 19th century in U.S. By 1920 fertility very low (2 children). Inefficiently low? Assume parents were transfer-constrained. Consumption of old is low. Solution: introduction of PAYG pensions (1936). May have led to baby boom and bust.

15 14 / 35 Model: PAYG Pension System max {c m,c o,n,b,s} s.t. u(c m ) + βu(c o ) + γu(n) + ζu(c k ) c m + θn + s w m c o + bn Rs + T c k = w k + b τ b b Government budget balance: T = nτ

16 PAYG Pension System Suppose b binding Increase in τ increases T income effect without changing marginal cost of a child. Increases ˆn and desired transfer, b (τ). For large enough τ: constraint no longer binding. Suppose b not binding Increase in τ increases actual transfer, b (τ) makes children more costly. Decreases n (τ) 15 / 35

17 16 / 35 Thought Experiment : increase b from to 0 τ = 0 constant : b=0 constant increase τ w k gradually from 0 to 15%.

18 17 / 35 Numerical Example Transfer: b 0 Property Rights PAYG Actual Transfer Desired Transfer Time Fertility: 2n Time

19 18 / 35 U.S. Total Fertility Rate 8 7 TFR (Haines (1994)) Total Fertility Rate Year

20 19 / 35 Efficiency of PAYG Pension System? Budget constraint: c o + [c k w k + τ]n Rs + T Lump-sum taxes (per person) are not really lump! They distort fertility decision (more children = more taxes). Parent does not realize that more children also increase T. Even if constraint not binding: Fertility inefficiently low.

21 20 / 35 Alternative I: Pay-out depends on n T(n) = nτ max {c m,c o,n,b,s} s.t. u(c m ) + βu(c o ) + γu(n) + ζu(c k ) c m + θn + s w m c o + bn Rs + nτ c k = w k + b τ b b Note that b and τ enter symmetrically. increase τ increases b (τ) one for one Choose τ s.t. b (τ) b not binding. Allocation is A-efficient. Aligns costs and benefits of child-rearing.

22 21 / 35 Alternative II: Fertility subsidy and Government debt max {c m,c o,n,b,s} s.t. u(c m ) + βu(c o ) + γu(n) + ζu(c k ) c m + θn + (s + d) w m + τ m n c o + bn R(s + d) c k = w k + b τ k b b Government budget constraint: Period 1: d = nτ m Period 2: Rd = nτ k

23 Summary Document shift in property rights over children As constraint becomes binding: 1. Fertility declines. 2. Inefficiently low fertility 3. Coase s Theorem. PAYG pensions: 1. Alleviates downward pressure on fertility Baby boom? 2. Distorts fertility decision. 3. Alternatives: Fertility dependent PAYG or Fertility subsidy and Gov debt What s next? 22 / 35

24 What s next? Analogy investment in children s human capital Quantitative importance? How much of a contribution to fertility history in the US? Average decrease, boom and bust? Differential fertility? Which countries experience(ed) inefficiently low fertility? Welfare gains from policy reform? Political economy of shift in property rights? Who wanted to pass laws and why? Who was constrained? humank heterog 23 / 35

25 24 / 35 Stubborn Son Law Act of the General Court of Massachusetts in 1646: If a man have a stubborn or rebellious son, of sufficient years and understanding, viz. sixteen years of age, which will not obey the voice of his Father or the voice of his Mother, and that when they have chastened him will not harken unto them: then shall his Father and Mother being his natural parents, lay hold on him, and bring him to the Magistrates assembled in Court and testify unto them, that their son is stubborn and rebellious and will not obey their voice and chastisement... such a son shall be put to death. States that followed were Connecticut 1650, Rhode Island 1668, New Hampshire history next

26 25 / 35 Old Age Support for Parents English Poor Laws of 1601: The family, as a unit, was to be responsible for poverty-stricken kinfolk[...] The Poor Law did not concentrate on the children of elderly, but extended the network of potential support to include the fathers and mothers, and the grandfathers and grandmothers, of the poor[...] When these laws passed over into the American scene, during the seventeenth and eighteenth centuries, the focus was on the responsibilities of children towards their elderly parents[...] (Callahan 1985, pg 33) Code Napoléon (1804), Art. 205: Children are liable for the maintenance of their parents and other ascendants in need. history next

27 26 / 35 Other Legal Ways of Controlling Children Patria Potestad (Spain and France) The control which a father exercised over his children, a control similar to that over material things and one which permitted a father to sell or pawn a child if necessary and even to eat it in an extreme case Lettres de Cachet Letters signed by the king often used to enforce authority and sentence someone without trial. They could be used by parents when their child refused to follow parental direction with respect to a marriage partner or career. Parental consent in marriage decisions (Code Napoléon 1804) [...]children, regardless of age, were bound to seek the consent of their parents (or grandparents if both parents were deceased) (Article 151). history next

28 27 / 35 Adding Human Capital Parents cannot borrow against children s income and resulting inefficiencies in human capital investment pointed out before in the literature. Fernandez and Rogerson (2001), Aiyagari, Greenwood, Seshadri (2002), Boldrin and Montes (2005),... Focus in literature: borrowing constraints in exogenous fertility context. next

29 Adding human capital to our model max u(c m ) + βu(c o ) + γu(n) + ζu(c k ) s.t. c m + (θ + e)n + s w m c o + bn w o + Rs c k = w k Ae ψ + b b 0 next 28 / 35

30 29 / 35 Costs and Benefits of investing in children and education [ γu (n) = u (c m ) θ + e + b ] R The higher b, the more likely constraint is binding holding e fixed, increases cost of children. Distorts incentive to have children.

31 29 / 35 Costs and Benefits of investing in children and education [ γu (n) = u (c m ) θ + e + b ] R The higher b, the more likely constraint is binding holding e fixed, increases cost of children. Distorts incentive to have children. The higher b, the larger λ b [βu (c o )n λ b ]w k Aψe ψ 1 = u (c m )n holding n fixed, decreases benefits of education per child. Distorts incentive to educate children. next

32 30 / 35 Solution: Model with Education not binding binding (b = ) (b < b = 0) education ( ) w k 1 Aψ 1 ψ R > ζψθ γ ζψ fertility (γ ζ)w m (1+β+γ)[θ+e (1 1 ψ )] > γw m (1+β+γ)(θ+e ) next

33 31 / 35 Analogy: Fertility and Human Capital decisions Both e and n are inefficiently low when constraint binding. One critical difference: costs and benefits of HK investments aligned if child makes decisions and credit markets function. Not possible for fertility decisions a child can never decide to be born! next

34 A note on Heterogeneity (e.g. in w m ) Suppose children cost time θ = twm i and wm i and wk i not perfectly correlated: max {c m,c o,n,b,s} s.t. u(c m ) + βu(c o ) + γu(n) + ζu(c k ) c m + s wm(1 i tn) c o + nb Rs c k wk i + b b b Then n i decreasing and b i increasing in w i m. As b increases, poor people are constrained first. Their fertility drops to inefficiently low levels. solnonbind solbind CBR next 32 / 35

35 33 / 35 Heterogeneity in (γ, ζ) Suppose children cost time θ = tw m and people differ in their preference for number versus well-being of children: max {c m,c o,n,b,s} s.t. u(c m ) + βu(c o ) + γ i u(n) + ζ i u(c k ) c m + s w m (1 tn) c o + nb Rs c k w k + b b b Then n i decreasing, I i = w m (1 tn i ) increasing and b i increasing in (ζ i /γ i ). As b increases, poor people are constrained first. Their fertility drops to inefficiently low levels.

36 34 / 35 U.S. Differential Fertility, Bottom minus top half Property rights shift contributed to fertility decline through decline in differential fertility?

37 35 / 35 Differential fertility decline Result: Data: Bottom half of income distribution decreased fertility relative to top. Model: Both, with ability or preference heterogeneity, lower income groups decrease fertility first as rights shift. solnonbind solbind CBR next