The optimal fiscal policy in a OLG model with endogenous fertility

In this paper we show that, when endogenous fertility choices are accounted for, the traditional rule provided by Diamond (1965) should be amended in order to effectively implement the first best allocation of an OLG economy, even in the presence a non distortionary tax for financing national debt. With Cobb-Douglas preferences and fixed costs for rearing children, it turns out that the implementable equilibrium is in general suboptimal and dynamically inefficient (i.e. with overaccumulation of physical capital). The reason for this result is that, when fertility choices are taken as endogenous, a further policy instrument is necessary for controlling it: in this respect, by combining a lump sum tax upon the young adult with a subsidy for each child or with a lump sum trasfer to the old, the first best allocation can be implemented.