Habit Formation, Dynastic Altruism, and Population Dynamics

Center of Economic Research Working Paper No. 07/77

34 Pages Posted: 19 Nov 2007

See all articles by Andreas Schäfer

Andreas Schäfer

University of Leipzig/Institute for Theoretical Economics/Macroeconomics

Simone Valente

Norwegian University of Science and Technology (NTNU)

Date Written: November 2007

Abstract

We study the general equilibrium properties of two growth models with overlapping generations, habit formation and endogenous fertility. In the neoclassical model, habits modify the economy's growth rate and generate transitional dynamics in fertility; stationary income per capita is associated with either increasing or decreasing population and output, depending on the strength of habits. In the AK specification, growing population and increasing consumption per capita require that the habit coefficient lie within definite boundaries; outside the critical interval, positive growth is associated with either declining consumption due to overcrowding, or extinction paths with declining population. In both frameworks, habits reduce fertility: the trade-off between second-period consumption and spending for bequests prompts agents to decrease fertility in order to make parental altruism less costly. This mechanism suggests that status-dependent preferences may explain part of the decline in fertility rates observed in most developed economies.

Keywords: Economic Growth, Endogenous Fertility, Habit Formation, Intergenerational Altruism, Overlapping Generations

JEL Classification: D91, J10, O11

Suggested Citation

Schäfer, Andreas and Valente, Simone, Habit Formation, Dynastic Altruism, and Population Dynamics (November 2007). Center of Economic Research Working Paper No. 07/77, Available at SSRN: https://ssrn.com/abstract=1031079 or http://dx.doi.org/10.2139/ssrn.1031079

Andreas Schäfer (Contact Author)

University of Leipzig/Institute for Theoretical Economics/Macroeconomics ( email )

Grimmaische Str. 12
D-04109 Leipzig, DE
Germany

Simone Valente

Norwegian University of Science and Technology (NTNU) ( email )

Department of Economics
NTNU Dragvoll
Trondheim NO-7491
Norway

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