Optimal intergenerational redistribution in a two-country model with endogenous fertility

We analyze a model with two countries that are linked by an integrated capital market. Fertility, and thus population growth, is endogenously determined by households. Our analysis proceeds in three steps: First, we characterize an optimal intertemporal and interregional allocation in a model with endogenous fertility and two countries. Second, we look for an institution supporting the optimal allocation. It turns out that in general, a decentralized equilibrium is inefficient. National public-pension systems with benefits that are related to the number of children implements the optimal allocation. This provides a justification for government interventions beyond its role as a "night-watchman.'' Third, we analyze whether national governments have the right incentives to implement the optimal system. It turns out that every national government has an incentive to deviate from the optimal structure and to shift part of the burden to the other country. Policy implications for the institutional arrangements within the European Union are discussed.