Millian Efficiency with Endogenous Fertility

J. Ignacio Conde-Ruiz, Eduardo Giménez and Mikel Pérez-Nievas

The Review of Economic Studies, 2010, vol. 77, issue 1, 154-187

Abstract: Should governments implement policies that affect fertility decisions on efficiency grounds? What is the correct notion of efficiency to use? To address these issues, this paper develops an extension of the notion of Pareto efficiency, referred to as Millian efficiency, to evaluate symmetric allocations in an overlapping generations setting with endogenous fertility. This extension is based on preferences of those agents who are actually alive, and exclusively allows for welfare comparisons of symmetric allocations. First, we provide necessary and sufficient conditions to determine whether an allocation is Millian efficient or not, and we show that the sufficient conditions for dynamic efficiency offered by Cass (1972) and Balasko and Shell (1980) cannot be directly applied when fertility decisions are endogenous. Second, we characterize Millian efficient allocations as the equilibria of a decentralized price mechanism, and we present a sufficient condition for dynamic efficiency that uses the sequence of prices associated to such decentralized equilibria. Finally, we analyse how intergenerational policies should be designed to restore efficiency and achieve net welfare gains in two different settings in which markets yield inefficient allocations: dynamic inefficiencies and financial market incompleteness regarding human capital. In the former, a pay-as-you-go social security system eliminates dynamic inefficiencies, provided pensions are explicitly linked with fertility decisions. In the latter, a specific link between social security and public education becomes a necessary condition for Millian efficiency. Copyright , Wiley-Blackwell.

Date: 2010
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Related works:
Working Paper: Millian efficiency with endogenous fertility (2007)
Working Paper: Millian Efficiency with Endogenous Fertility (2006)
Working Paper: Millian Efficiency with Endogenous Fertility
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