Hidden Information Problems in the Design of Family Allowances

Alessandro Cigno, Annalisa Luporini () and Anna Pettini

No 790, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We consider a case where some of the parents have higher ability to raise children than others. First-best policy gives both types of parents the same level of utility. If parental actions are not fully observable, however, the policy maker has to take into account the incentive-compatibility constraint that more able parents should not find it profitable to misrepresent their true ability by investing less in their children, and having a lower number of children. The second-best policy induces more able parents to have the first-best number of children, and to invest in each child at the first-best level. Less able parents are induced to have fewer children than in first best, and will underinvest in each child. Whether the government should subsidize more the more able parents, or the less able ones, depends on the properties of the cost function. In second best, however, less able parents will end up with lower utility than more able parents whatever the cost function.

Keywords: optimal taxation; family allowances; parental ability; hidden information; agency problem (search for similar items in EconPapers)
JEL-codes: D13 D82 H31 J13 J24 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2003-06
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - published in: Journal of Population Economics, 2004, 17 (4), 645-655

Downloads: (external link)
https://docs.iza.org/dp790.pdf (application/pdf)

Related works:
Journal Article: Hidden information problems in the design of family allowances (2004)
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:iza:izadps:dp790

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().