Status Externalities and Low Birth Rates in Korea

Michele Tertilt, Seongeun Kim and Minchul Yum

No 16271, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: East Asians, especially South Koreans, appear to be preoccupied with their offspring's education---most children spend time in expensive private institutes and in cram schools in the evenings and on weekends. At the same time, South Korea currently has the lowest total fertility rate in the world. In this paper, we propose a theory with status externalities and endogenous fertility that connects these two facts. Using a quantitative heterogeneous-agent model calibrated to Korea, we find that fertility would be 16% higher in the absence of the status externality. Furthermore, childlessness in the poorest quintile would fall from five to less than one percent. We then explore the effects of various government policies. A pro-natal transfer increases fertility and reduces education while an education tax reduces both education and fertility, with heterogeneous effects across the income distribution. The policy mix that maximizes the current generation's welfare consists of an education tax of 12% and moderate pro-natal transfers---a monthly child allowance of 3% of average income for 18 years. This would raise average fertility by about 5% and decrease education spending by 16%. Although this policy increases the welfare of the current generation, it may not do the same for future generations as it lowers their human capital

Keywords: Fertility; Education; Korea; Externality; Status; Childlessness (search for similar items in EconPapers)
JEL-codes: D13 D62 E24 I2 J10 J13 O40 (search for similar items in EconPapers)
Date: 2021-06
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Related works:
Working Paper: Status Externalities and Low Birth Rates in Korea (2021)
Working Paper: Status Externalities and Low Birth Rates in Korea (2019)
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