Optimal Intergenerational Redistribution in a Two-Country Model with Endogenous Fertility

We analyze a model with two countries that are linked by anintegrated capital market. Fertility, and thus population growth, isendogenously determined by households. Our analysis proceeds inthree steps: First, we characterize an optimal intertemporal andinterregional allocation in a model with endogenous fertility andtwo countries. Second, we look for an institution supporting theoptimal allocation. It turns out that in general, a decentralizedequilibrium is inefficient. National public-pension systems withbenefits that are related to the number of children implements theoptimal allocation. This provides a justification for governmentinterventions beyond its role as a ``night-watchman.'' Third, weanalyze whether national governments have the right incentives toimplement the optimal system. It turns out that every nationalgovernment has an incentive to deviate from the optimal structureand to shift part of the burden to the other country. Policyimplications for the institutional arrangements within the EuropeanUnion are discussed.