of 22
8/12/2019 Pop Lecture 206
1/22
Sriya Iyer
Faculty of Economics and St. Catharines College
University of Cambridge
Demography and Development
Topic 2The Household Demand Approach
and its Applications
8/12/2019 Pop Lecture 206
2/22
1
Recapitulate
The relationship between population growth and economic development can be explained by thetheory of 'demographic transition' and by Malthusian theory
Transition theory is purely descriptive explaining fertility transitions in terms of the black box ofmodernization
Malthusian theories are flawed by the assumptions of diminishing returns and of a positive incomeeffect on fertility
We need an alternative theory of population and development
8/12/2019 Pop Lecture 206
3/22
2
What are the origins of the neoclassical household demand approach?
Approach not a single theory: Becker 1960, 1981; Willis 1973; Becker and Barro 1988
Four developments in economics underlie the household demand model:
Investment in human capital
Benefits of children different in rich and poor countries
Allocation of human time
Market and household activities
Money costs and time costs
Household production function
Household services
Child services
Household as consumption or production unit
Assumptions similar to the theory of the firm
8/12/2019 Pop Lecture 206
4/22
3
How do we set up a household demand model for fertility?
Utility-function:
U = U(N, Q, Z)
where:
N = number of children
Q = quality per child = household investment per child
Z = all sources of satisfaction to husband/wife other than those arising from children
Production function:
C = NQ = f(tc, xc)
where:
C = child services = product of no. children (N) and quality per child (Q)
tc= vector of total amount of time parents devote to children during parents lifetime xc= vector of total amount of goods parents devote to children during parents lifetime
8/12/2019 Pop Lecture 206
5/224
Household demand model (continued)
Budget constraint(this is a full-income wealth constraint, which includes both money and time, and in which
income is exhausted on child quantity N, child quality Q, and all other satisfactions Z):
I = NQc+ NPN+ QPQ+ ZZ
where:
I = familys full income
i= cost-minimizing shadow prices; i.e.
c= shadow-price of child services
Z= shadow-price of all other commodities/satisfactions
PN = fixed price applying to component of child costs independent of level of Q chosen
PQ= fixed price applying to component of child costs independent of level of N chosen
8/12/2019 Pop Lecture 206
6/225
Household demand model (continued)
Derived demand for children:
N = demand for child quantity = N (I, c, Z, PN, PQ)
Q = demand for child quality = Q (I, c, Z, PN, PQ)
Z = demand for other satisfactions = Z (I, c, Z, PN, PQ)
8/12/2019 Pop Lecture 206
7/226
What does this model predict about the relationship between fertilityand income?
Child services are normal goods
Rising wages increase value of time
Price of children rises relative to price of less time-intensive satisfactions
Price of children rises because womens time costs rise disproportionately
8/12/2019 Pop Lecture 206
8/22
7
8/12/2019 Pop Lecture 206
9/22
8
What does the model predict about the tradeoff between childquantityand quality?
Differing income elasticities of demand for quantity and quality
Demand for child quality may be more responsive to income gains than demand for child quantity.
Interaction between quality and quantity
A fall in the shadow price of child quality causes a decrease in demand for child quantity
8/12/2019 Pop Lecture 206
10/22
9
What does the model predict about the expected benefits from havingchildren?
Shift from household to market production makes child labour input less valuable
Infrastructure reduces value of child labour to collect households fuel and water requirements
Structural change in economy reduces market jobs for children
Greater access to capital markets reduce savings/investment value of children
Insurance, pensions, state welfare reduces old-age motive for having children
Greater geographical mobility reduces certainty of old-age support from children
8/12/2019 Pop Lecture 206
11/22
10
What are the limitations of the household demand model?
Assumes fertility maximisation
Assumes complete information and certainty
Assumes a household utility function
Explains changes at the margin better than changes over time
8/12/2019 Pop Lecture 206
12/22
11
What is the empirical evidence on the price-income relationship?
Mothers time is a key component in the price of a child
Consider time taken to bear and rear children
Reproductive costs differ between men and women
Costs of children spread across extended family leads to reproductive free-riding e.g. in India and
in Africa
8/12/2019 Pop Lecture 206
13/22
12
What do empirical findings show about the relationship betweenwomenseducation and fertility in poor economies?
An increase in female education reduces fertility
Primary schooling may be an exception in some contexts e.g. in Africa
Education lowers fertility other than through the value of time
Increases efficiency of contraceptive use
Informs women better about non-household options
Increases efficiency in producing high-quality children
Increases performance of status production duties
8/12/2019 Pop Lecture 206
14/22
13
What do the empirical findings show about the relationship betweenfemale economic activity and fertility?
A universal negative relationship does not exist
But a clear association can be seen between
fertility, female economic activity and female
education
Both female economic activity and adult
literacy variables in table are reported as rates(% age 15 and above)
Source: Compiled from the UNDP Human
Development Report, United Nations (2000)
Region TFR 1995-
2000
Female
economic
activity 1998
Female adult
literacy 1998
Arab states 4.1 30.8 47.3
East Asia 1.8 72.3 75.5
Latin America 2.7 41.4 86.7
South Asia 3.3 42.8 42.3
South-east
Asia
2.7 60.8 85.0
Sub-Saharan
Africa
5.5 62.0 51.6
Least
developed
countries
4.9 64.9 41.0
All developed
countries
3.0 55.6 64.5
8/12/2019 Pop Lecture 206
15/22
14
What is the empirical evidence on the quantity-quality relationship?
Trade-off between child quantity and child quality implies that as income rises, demand for qualityincreases faster than demand for quantity
Income effect conceals a hidden price effect: a shift to rising Q => PNwill rise => demand more Q,less demand for N
Empirically as economies grow and develop the average quality of children rises
Labour market changes also important
Evidence from South India: time spent by children in school has a significant negative effect onfamily size (e.g. Kanbargi and Kulkarni, 1986)
How much children go to school is partly a function of child labour requirements (e.g. Iyer, 2002)
Evidence from the Progresa scheme in Mexico
8/12/2019 Pop Lecture 206
16/22
8/12/2019 Pop Lecture 206
17/22
16
What is the empirical evidence on the income-benefits of childbearing?
Children contribute to current income
Children are costless to rear by the time they reach adolescence in some poor countries (Cain,
1977)
The lack of fuel and water infrastructure increases the value of children as producer goods
The population-poverty-environment relationship (Dasgupta 1993; 2000)
8/12/2019 Pop Lecture 206
18/22
17
8/12/2019 Pop Lecture 206
19/22
18
How can we model children as investment goods?
Children contribute to future income
Lexicographic safety-first decision-rules show the probability that parents would have a son forold-age support (e.g. May and Heer, 1965; Cain 1984)
Offspring substitute for missing markets in social security
Social security in the formal and informal sectors
Rise in incomes can change parents investment decisions
Increases cash surplus for investment, awareness of alternative investments, availability of othermethods of saving and insurance
Evidence on widows in Bangladesh (Cain 1977, 1984) and microcredit schemes
Evidence on pensions in Mexico (Nugent and Gillaspy 1983)
8/12/2019 Pop Lecture 206
20/22
19
So what is the bottom line on the household demand approach?
Model explains fertility decisions in terms of money costs of children and opportunity costs of
parental time
Empirical findings address the relationship between income and price, quantity & quality, income
and benefits of childbearing
=> Compared to previous approaches, it explains better both the current causes of high
fertility in less-developed countries, and the reasons behind the fertility transition in the
historical experience of more developed ones.
8/12/2019 Pop Lecture 206
21/22
20
Useful Reading (the most important readings are starred)
On the Household Demand Approach:
N. Birdsall, Analytical approaches to population growth, in H.Chenery & T. N. Srinivasan (eds.), Handbook of developmenteconomics vol. 1 (1988).
*G. S. Becker, An economic analysis of fertility, in A. J. Coale(ed.), Demographic and economic change in developedcountries (1960), 209-31.
*R. Willis, A new approach to the economic theory of fertility,Journal of political economy March/April (1973) [supplement],S14-S64.
G. S. Becker & R. Barro, A reformulation of the economictheory of fertility, Quarterly journal of economics 103 (1988), 1-25.
T. P. Schultz, Demand for children in low income countries, inM. R. Rosenzweig & O. Stark (eds.), Handbook of population
and family economics (Amsterdam, 1997).
On Price-Income Effects
G. Standing, Womens work activity and fertility, in R.A.
Bulatao & R.D. Lee, Determinants of fertility in developing
countries (1983), 417-46.
*C. L. Jolly & J. N. Gribble, The proximate determinants of
fertility, in K. A. Foote et al. (eds.), Demographic change inSub-Saharan Africa, Washington DC (1993).
J. Drze and M. Murthi, Fertility, Education and Development:
Evidence from India, Population and Development Review
27:1, 33-63, (2001).
8/12/2019 Pop Lecture 206
22/22
21
Useful Reading (continued)
On Quantity-Quality Relationships
*G.S. Becker & G.H. Lewis, On the interaction between the
quantity and quality of children Journal of political economy
81:2 (1973), 279-88.
J. Behrman & B.L. Wolfe, The socioeconomic impact of
schooling in a developing country, Review of economics and
statistics 66 (1984).
On Income-Benefits of Childbearing
*R. Kanbargi & T. Kulkarni, Child labour and schooling in
South India, in J. Stoeckel & A. K. Jain (eds.), Fertility in Asia:
Assessing the impact of development projects (1986).
*M. Cain, The Economic Activities of Children in a Village in
Bangladesh, Population and Development Review, 3, 201-
227 (1977).
M. Cain, Womens Status and Fertility in DevelopingCountries: Son Preference and Economic Security. World
Bank Staff Working Papers, 682 (1984).
P. Dasgupta, Population and resources: an exploration of
reproductive and environmental externalities, Population and
development review 26, 643-689 (2000).
S. Iyer, Demography and Religion in India, Delhi: Oxford
University Press, Chapter 8 (2002).
*J. Nugent & T. Gillaspy, Old age pension and fertility in rural
areas of less developed countries: Some evidence from
Mexico, Economic development and cultural change 31
(1983).
