Child-related policies: is there a room for welfare improvement?
How does income risk affect the optimal size of the child-related transfer system? I answer this question in an overlapping generations model with endogenous fertility and PAYG social security. I show that the optimal size of the child-related transfer is increasing in income risk. First, in the stylized model, I provide the intuition behind this result. Second, I quantify the size of welfare gains due to child-related transfer reform in a full-fledged model calibrated to the US economy. Expansion of child-related transfer yields to welfare gain even with constant income dispersion. In a scenario with higher income dispersion, welfare gains increase from 1.08% to 1.2% of lifetime consumption. Third, I show that in a scenario with high-income dispersion, even higher welfare gains may be obtained if the child-related transfer system has a more redistributive nature.