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J Popul Econ (2012) 25:10191043 DOI 10.1007/s00148-011-0372-x
ORIGINAL PAPER
On the dynamics of the age structure, dependency, and consumption
Heinrich Hock David N. Weil
Received: 11 May 2009 / Accepted: 31 January 2011 / Published online: 31 May 2011 Springer-Verlag 2011
Abstract We examine the effects of population aging due to declining fertility and rising elderly life expectancy on consumption possibilities in the presence of intergenerational transfers. Our analysis is based on a highly tractable continuous-time overlapping generations model in which the population is divided into three groups (youth dependents, workers, and elderly dependents) and lifecourse transitions take place in a probabilistic fashion. We show that the consumption-maximizing response to greater longevity in highly developed countries is an increase in fertility. However, with larger transfer payments, the actual fertility response will likely be the opposite, leading to further population aging.
Responsible editor: Junsen Zhang
Heinrich Hock acknowledges financial support for early work on this paper from an NICHD training grant (T32-HD07338) to the Population Studies and Training Center at Brown University. This paper has benefited from comments by participants at the Brown University Department of Economics Macro Lunch and the 2006 Conference on Population Aging, Intergenerational Transfers, and the Macroeconomy. We are particularly grateful to Alexia Prskawetz and two anonymous referees for valuable feedback. All errors are our own.
H. HockMathematica Policy Research, 600 Maryland Avenue SW, Suite 550, Washington, DC 20024-2512, USA
D. N. Weil (B)
Department of Economics, Brown University, Box B, Providence, RI 02912, USAe-mail: [email protected]
D. N. WeilNBER, Cambridge, MA, USA
1020 H. Hock, D.N. Weil
Keywords Aging Consumption Intergenerational transfers
JEL Classification E21 H55 J13
1 Introduction
This paper considers how changes in fertility affect consumption through changes in the structure of dependency and how, via its effect on the dependency burden faced by working-age adults, the age structure in turn affects fertility. Highlighting the role of intergenerational transfers, we develop a highly tractable continuous-time overlapping generations model that allows us to graphically analyze of the relationships between economic dependency and the age structure. The model also clarifies a potentially important feedback loop between the two.
Our interest in the mutual dependency of fertility and a societys age structure is primarily motivated by considering the future prospects of some of...