Resource title

Hidden Information Problems in the Design of Family Allowances

Resource image

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Resource description

We consider a case where some of the parents have higher ability to raise children than others. First-best policy gives both types of parents the same level of utility. If parental actions are not fully observable, however, the policy maker has to take into account the incentive-compatibility constraint that more able parents should not find it profitable to misrepresent their true ability by investing less in their children, and having a lower number of children. The second-best policy induces more able parents to have the first-best number of children, and to invest in each child at the first-best level. Less able parents are induced to have fewer children than in first best, and will underinvest in each child. Whether the government should subsidize more the more able parents, or the less able ones, depends on the properties of the cost function. In second best, however, less able parents will end up with lower utility than more able parents whatever the cost function.

Resource author

Alessandro Cigno, Annalisa Luporini, Anna Pettini

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/20035

Resource license

Adapt according to the presented license agreement and reference the original author.