Real options and demographic decisions: empirical evidence from East and West Germany

Sumon Bhaumik and Jeffrey Nugent

Applied Economics, 2011, vol. 43, issue 21, 2739-2749

Abstract: Iyer and Velu (2006) have convincingly argued that contemporary analyses of fertility behaviour fail to explain why a woman (or a couple) will choose to postpone childbirth, and in particular to consider the role of uncertainty in this regard. They have addressed this lacuna in the literature by using a real options approach to model fertility decisions by relating uncertainty experienced by individuals to the likelihood of childbirth. However, they did not present empirical evidence. Since the theory implies the existence of two offsetting effects of uncertainty on fertility decisions, a positive insurance effect and a negative option value effect, it is not easy to reject the theory on the basis of empirical analysis, when one of these effects offsets the other. We construct such a test for East (and also West) Germany during that country's reunification, which takes advantage of the fact that because of the country's strong welfare system, the insurance effect should be dominated by the option value effect, thereby suggesting that the net relationship should be negative. The results provide rather strong support for the real options link, especially for Eastern Germany.

Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/00036840903373287 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:43:y:2011:i:21:p:2739-2749

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036840903373287

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().