Risky Child Investment, Fertility and Social Insurance in China

Xue Li, University of Maryland

This paper explains the decline in total fertility rate in China by investigating the quantitative effect of social insurance on peoples' fertility choice when investment in children is risky. The price and income effects are heterogeneous: low-income people tend to raise more children due to the reinforcing income and price effects, whereas for rich families the income effect dominates the price effect so that their fertility declines when social insurance is in place. Through decomposing calibration results and simulating TFRs for various parameter values, we show that liquidity constraints created by a public pension program plays a significant role in reducing fertility rate. Factors related to the rate of return on child investment, such as a slowing economic growth, a rise in the cost of childbearing, and potential social attitude changes such as expectations of lower transfers, also contribute to the long-term declining trend in fertility observed in the data.