DP9935 Aggregate Fertility and Household Savings: A General Equilibrium Analysis using Micro Data

Author(s): Abhijit Banerjee, Xin Meng, Tommaso Porzio, Nancy Qian
Publication Date: April 2014
Keyword(s): Demographic Structure, fertility, Savings
JEL(s): J11, J13, O11, O4
Programme Areas: Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9935

This study uses micro data and an OLG model to show that general equilibrium forces are critical for understanding the relationship between aggregate fertility and household savings. First, we document that parents perceive children as an important source of old-age support and that in partial equilibrium, increased fertility lowers household savings. Then, we construct an OLG model that parametrically matches the partial equilibrium empirical evidence. Finally, we extend the model to conduct a general equilibrium analysis and show that under standard assumptions and with the parameters implied by the data, general equilibrium forces can substantially offset the partial equilibrium effects. Thus, focusing only on partial equilibrium effects can substantially overstate the effect of a change in aggregate fertility on households savings.