Document Type

Working Paper

Publication Date


Working Paper Number

WP #12016, September 2012


We compare two institutions head on, a family compact -- a parent makes a transfer to her parent in anticipation of a possible future gift from her children -- with a pay-as-you-go, social security system in a lifecycle model with endogenous fertility wherein children are valued both as consumption and investment goods. Our focus is strictly on the pension dimension of these competing institutions. We show that an optimally-chosen family compact and a social security system cannot co-exist; indeed, the former may be preferred. A strong-enough negative shock to middle-age incomes destroys family compacts. While such a setting might appear ideal for the introduction of a social security system -- as the experience of Europe, circa 1880s, would suggest -- this turns out not to be the case: if incomes are too depressed to allow family compacts to flourish, they are also too low to permit introduction of an optimal social security system.

JEL Classification

E21, E32

File Format



29 pages

Included in

Economics Commons