DO FINANCIAL INCENTIVES AFFECT FERTILITY?

This paper investigates whether financial incentives, and in particular government child subsidies, affect fertility. We take advantage of a comprehensive, non-public, individuallevel panel data set that includes fertility histories and detailed individual controls for married Israeli women from 1999-2005, a period with substantial changes in the level of government child subsidies, but no changes in eligibility and coverage. We find a significant positive effect on fertility; the mean level of child subsidies produces a 6.9 percent increase in fertility, and we estimate the benefit elasticity to be in the range of 0.12- 0.18 and the price elasticity to be in the range of 0.088-0.13. The positive effect of child subsidies on fertility is absent from the upper part of the income distribution, but it is present across all religious groups. Using a differences-in-differences specification, we find that a large, unanticipated reduction in child subsidies that occurred in 2003 had a substantial negative impact on fertility. Overall, our results are consistent with the view that fertility responds to financial incentives and they indicate that the child subsidy policies used in many countries can have a significant influence on incremental fertility decisions.