Look for the next GCER Newsletter in June. Past Newsletters can be found here.
News Archive - Page 20
Mar 10, 2012
Jan 26, 2012
The memorandum extends the existing collaborative efforts between the Econ Department and IZA and initiates a number of new programs that include formal exchanges of faculty and graduate students and jointly sponsored workshops and conferences. These initiatives will largely work through GCER in coordination with IZA.
Jan 20, 2012
Professors Habyarimana and Jack
Jan 5, 2012
Two recent articles highlight research by GCER Fellow Luca Flabbi on wage inequality between men and women in the workplace.
A December article in Georgetown College News, and a January article in Georgetown University headline news discuss much of Flabbi's recent research on hiring practices, job and wage inequality, and the effects of job search and bargaining in the U.S. labor market.
Nov 29, 2011
Junior, the Risky Investment, Grandma, the Insurance Contract, and other bedtime stories as told by Gete and Porchia.
Children are sources of costs and benefits, both monetary and non-monetary. For these reasons economists have studied children as "assets" since the path-breaking work of Nobel Prize winner Gary Becker. However, GCER Faculty Fellow Pedro Gete and co-author Paolo Porchia claim in their recent paper "Fertility and Consumption when Having a Child is a Risky Investment" that the fertility literature is missing an important element: children are risky assets.
The risk comes from a variety of sources. A would-be parent cannot precisely forecast the cost of raising a child (presumably such costs would include opportunity cost of the parents' time and the effects on their career paths) or the benefits that a child will provide. A parent cannot predict, for example, how often her children will get sick, how much money and time it will cost to treat an illness, whether the child will need extra support at school or instead gets a full scholarship to go to Harvard, or whether her child becomes a successful actor who brings in millions of dollars to the family. Moreover, insure markets for many of the aforementioned contingencies, especially those related to the time costs for the parents, do not exist. As risky assets, children are at most partially insurable. Consequently, childbearing adds another source of risk to households.
Gete and Porchia study the consequences for fertility and consumption, taking into account that children are a source of risk that interacts with other risks borne by the parents. They develop a model in which the decision to have a child is comparable to the decision to exercise a financial option. In the model a household has an initial wealth and every period receives some stochastic income (assumed exogenous for simplicity). The household gets utility from consumption and can save at a risk free rate. Moreover, she can decide to have a child or to postpone the decision. If the household has a child then she is acquiring an irreversible, durable and non-tradable asset that gives her non-stochastic utility, but implies some stochastic exogenous costs. These uncertain costs can be correlated with income and are not insured by financial markets.
Gete and Porchia establish several new theoretical results: i) Higher cost volatility diminishes fertility and consumption. Intuitively, risk averse households are less willing to invest in riskier assets. Higher risk results in higher precautionary savings. ii) Risk aversion speeds up fertility and lowers consumption. This happens because a child is a safe source of utility (for example, parents know that they will enjoy playing with their children). This safe utility flow is an important characteristic of children when we think of them as an asset class. It pushes the household for early fertility to enjoy the children as an insurance mechanism against fluctuations in consumption. iii) Fertility is increasing in the correlation between income and child cost shocks. The household is reluctant to have children when positive cost shocks come together with bad income shocks (for example, households for whom child illnesses imply to reduce hours of work and this have negative consequences for the parents' careers). A pro-natalist government may encourage fertility by altering this correlation with policies of State-paid leaves when the child is ill, or by supporting childcare. iv) The sign of the correlation determines whether higher income volatility speeds up or delays fertility, although the effect decays with risk aversion. Households with volatile earnings will have more children if children hedge income shocks (for example, having a child increases the likelihood of receiving a subsidy when the parent is unemployed).
Finally, to motivate the empirical appeal of the theory, Gete and Porchia identify a variable that can serve as a proxy for child cost risk: the distance of the grandparents to the parents. They assume that households whose parents live close by face less uncertainty from the time costs shocks associated with raising a child. They show that this variable is a highly significant predictor of the likelihood of childbearing. The higher the distance to the parents the smaller the likelihood of childbearing. Distance is significant also when controlling for variables commonly associated with the fertility decision, such as income, wealth, income over wealth, age of the householder, race, religion and education. Hence, when financial markets do not insure the risks associated with child rearing, an available grandparent turns out to be excellent insurance contract.