Public pensions,family allowances and endogenous demographic change

In addition to an old-age insurance system which redistributes income from the young to the old, family allowances build a further redistributive system which typically favors younger and burdens older generations. Family allowances have two main tasks: first, child allowances offer an incentive for child-bearing which influences fertility in an economy. Second, subsidies which ease the financial burden of a child's education guarantee a higher average level of productive skills and therefore enhance net domestic product. If individual demand for having and educating children leads to an impact on the economic system as a whole, we have external effects. In such a case, corrective taxation (Pigouvian tax) should be considered.Earlier versions of this paper were presented at conferences in Bergen, Dublin, Gmunden, Oldenburg and Vienna. The paper benefitted greatly from discussions with participants of these conferences and from the suggestions of two anonymous referees of this journal. Financial support through the Norwegian Research Council (the Ruhrgas scholarship scheme) and the Deutsche Forschungsgemeinschaft (Sonderforschungsbereich 303) is gratefully acknowledged.