Demographic transition and Economic development : the role of child costs

Abstract This paper analyzes the interactions between demographic transition and economic development, focusing on two child costs: time child-rearing cost and physical child-rearing cost. To analyze the interactions, we construct two overlapping generations model: human capital accumulation model and physical capital accumulation model. The two child costs, in particular, physical child cost plays crucial role in appearing non-monotonous fertility dynamics since it generates income effect. In both growth models, increase in physical child cost decreases the fertility, while it promotes economic development by dilution effect. Since increase in physical child cost encourages to start investing in human capital, it facilitates more rapid the timing of demographic transition in human capital accumulation model and therefore it gets the economy out of development trap. In contrast, it slows down the timing in physical capital accumulation model due to increase in income effect