TY  - JOUR
AU  - Hock,Heinrich
AU  - Weil,David N.
TI  - The Dynamics of the Age Structure, Dependency, and Consumption
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12140
PY  - 2006
Y2  - April 2006
UR  - http://www.nber.org/papers/w12140
L1  - http://www.nber.org/papers/w12140.pdf
N1  - Author contact info:
Heinrich Hock
E-Mail: hhock@fsu.edu

David N. Weil
Department of Economics
Box B
Brown University
Providence, RI 02912
Tel: 401/863-1754
Fax: 401/863-1970
E-Mail: david_weil@brown.edu
AB  - We examine the dynamic interaction of the population age structure, economic dependency, and fertility, paying particular attention to the role of intergenerational transfers. In the short run, a reduction in fertility produces a %u201Cdemographic dividend%u201D that allows for higher consumption.  In the long run, however, higher old-age dependency can more than offset this effect. To analyze these dynamics we develop a highly tractable continuous-time overlapping generations model in which population is divided into three groups (young, working age, and old) and transitions between groups take place in a probabilistic fashion. We show that most highly developed countries have fertility below the rate that maximizes steady state consumption. Further, the dependency-minimizing response to increased longevity is to raise fertility. In the face of the high taxes required to support transfers to a growing aged population, we demonstrate that the actual response of fertility will likely be exactly the opposite, leading to increased population aging.
ER  -