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Applied Micro Workshop – Michèle Tertilt, “Status Externalities and Low Birth Rates in Korea”

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Seongeun Kim, Michèle Tertilt, and Minchul Yum: “Status Externalities and Low Birth Rates in Korea” South Korea has been experiencing a very low total fertility rate around 1.2 over the last two decades. A serious concern of the Korean government about low fertility is demonstrated by its billions-dollars worth spending in recent years. In this paper, we aim to understand why the birth rate is so low in Korea and to assess whether there is a reason for the government to be concerned. To do so, we propose status externalities as a new reason for low fertility. In our model with endogenous fertility, parents care about the education of their children relative to other parents’ children. We find that in equilibrium, parents over-invest in education and under-invest in fertility. We calibrate the model to Korean data to quantify the role of the status externality. We find that without the externality, fertility would be 17% higher. We also find that the externality plays an important role in explaining the fertility–income relationship, which is positive in Korea, in contrast to most other countries. We conduct several policy experiment using the calibrated model. We find that simply taxing education would be counterproductive. It would lower education investments as desired (among the parents), but it would make children so much more expensive that fertility would actually fall further. Moreover, future generations would be worse off in welfare terms, as they would now start life with a lower human capital stock. Subsidizing fertility, on the other hand, seems a more promising policy as it increases fertility and lowers education simultaneously. However, future generations are also worse off. We conclude that even in the presence of externalities, it is not clear whether the Korean government should be actively pursuing family planning policies—unless the goal is to redistribute resources across generations.

Event details
  • Presentation
When Oct 22, 2019
from 16:00 to 17:30
Where briq, Seminar Room 9/1.1, Schaumburg-Lippe-Straße 9
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