A Contribution to the Economic Theory of Fertility

The evidence strongly suggests a robust negative relationship between income and fertility, anda positive relationship between income and longevity. This is puzzling for standard dynamicmodels. For instance, altruistic models that use the most standard preferences in macro-timeseparable CRRA with low elasticity of intertemporal substitution (EIS)-correctly predict a posi-tive longevity-income relationship for rich individuals, but also predict a positive fertility-incomerelationship, contrary to the data. We show that a non-separable formulation of preferences thatallows for a low EIS but a high "elasticity of intergenerational substitution" (EGS) can simul-taneously account for the evidence of declining demand for children and increasing demand forlongevity as income increases. The model with a single elasticity cannot account for both. Ourresults suggests a major role for a new parameter in macro, the EGS. While the EIS mostlyinfluences short-term economic decisions, the EGS influences mostly long-term economic choices.[...]