Optimal family policy in the presence of moral hazard, when the quantity and quality of children are stochastic.

We examine the second-best family policy under the assumption that both the number, and the future earning capacities of the children born to a couple are random variables with probability distributions conditional on unobservable parental actions. Potential parents take their decisions without taking into account the e¤ects of these actions on the government?s future tax revenue. The second-best policy provides parents with credit and insurance, and allows them to appropriate the external benefits of their actions.