Fines, Limited Liability and Fertility
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Pro-natal policies have been studied extensively and found effective in increasing fertility, but the effects of counter-natal policies have been largely ignored. Moreover, it is taken for granted that counter-natal policies such as fines should have a universally negative effect on fertility. This paper develops a theory on fines and fertility based on the unique case of rural China, where the government assigns birth quotas to households and above-quota births are fined. Treating children as an investment good and taking limited liability into consideration, we show that the effect of the fine on above-quota births differs substantially across wealth levels. Indeed, the fertility of poor households does not vary with the fine. The optimal fine to control birth should be significantly high. When the government also cares about fine revenues, however, it will set a lower fine to “encourage” above-quota births from rich households, who then “contribute” to the local government’s discretionary revenue. For these households, the effect of the fine on fertility is negative but diminishes with wealth. Employing data from rural China, we find supporting evidence for our theory.
JOUR
Li, Hongbin
Zhang, Junsen
2004
Unpublished document. Department of Economics, The Chinese University of Hong Kong
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