Federalism, Fertility and Growth

This paper analyses the effect of federalism on fertility and growth. In a model with human capital accumulation and endogenous fertility, two regimes of education finance are compared: central and local education. Using numerical simulation, I find that local education finance yields higher growth at the price of increased inequality. Aggregate fertility may be lower or higher under federalism. Interestingly, the fertility differential is reversed: while under central finance, rich families have fewer children than poor ones (when the elasticity of substitution between children and consumption is large), the opposite may occur under local finance. The paper also tests the relationship between fertility rates and fiscal decentralisation empirically on a panel of OECD countries and finds a weak negative effect of decentralisation on total and differential (poor minus rich) fertility.