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Real options and demographic decisions: empirical evidence from East and West Germany

Author

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  • Sumon Kumar Bhaumik
  • Jeffrey Nugent
Abstract
Iyer and Velu (2006) have convincingly argued that contemporary analyses of fertility behaviour fail to explain why a woman (or a couple) will choose to postpone childbirth, and in particular to consider the role of uncertainty in this regard. They have addressed this lacuna in the literature by using a real options approach to model fertility decisions by relating uncertainty experienced by individuals to the likelihood of childbirth. However, they did not present empirical evidence. Since the theory implies the existence of two offsetting effects of uncertainty on fertility decisions, a positive insurance effect and a negative option value effect, it is not easy to reject the theory on the basis of empirical analysis, when one of these effects offsets the other. We construct such a test for East (and also West) Germany during that country's reunification, which takes advantage of the fact that because of the country's strong welfare system, the insurance effect should be dominated by the option value effect, thereby suggesting that the net relationship should be negative. The results provide rather strong support for the real options link, especially for Eastern Germany.

Suggested Citation

  • Sumon Kumar Bhaumik & Jeffrey Nugent, 2011. "Real options and demographic decisions: empirical evidence from East and West Germany," Applied Economics, Taylor & Francis Journals, vol. 43(21), pages 2739-2749.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:21:p:2739-2749
    DOI: 10.1080/00036840903373287
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    References listed on IDEAS

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    1. Bonin, Holger & Euwals, Rob, 2001. "Participation Behavior of East German Women after German Unification," IZA Discussion Papers 413, Institute of Labor Economics (IZA).
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    5. Claudio Costanzo, 2022. "Robots, Jobs, and Optimal Fertility Timing," Working Papers ECARES 2022-36, ULB -- Universite Libre de Bruxelles.
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    8. Wolfgang Auer & Natalia Danzer, 2016. "Fixed-Term Employment and Fertility: Evidence from German Micro Data," CESifo Economic Studies, CESifo Group, vol. 62(4), pages 595-623.
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    13. Wolfgang Auer & Natalia Danzer, 2015. "Uncertainty in the labour market: How does fixed-term employment affect fertility and mental health of the young generation?," IBS Working Papers 6/2015, Instytut Badan Strukturalnych.
    14. Wolfgang Auer & Natalia Danzer & Anita Fichtl & Anita Dietrich, 2015. "Ökonomische Unsicherheit: Befristete Verträge erschweren Familiengründung," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(18), pages 35-41, September.
    15. Inga Laß & Irma Mooi-Reci & Mark Wooden & Martin Bujard, 2024. "Temporary employment and first births: A path analysis of the underlying mechanisms using Australian and German panel data," Melbourne Institute Working Paper Series wp2024n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    16. Adrián Nieto, 2018. "Permanent employment and fertility: The importance of job security and the career costs of childbearing," Discussion Papers 2018/01, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    17. Arpino, Bruno & LUPPI, FRANCESCA & Rosina, Alessandro, 2021. "Changes in fertility plans during the COVID-19 pandemic in Italy: the role of occupation and income vulnerability," SocArXiv 4sjvm, Center for Open Science.
    18. Brian Buh, 2021. "Measuring the Effect of Employment uncertainty on Fertility in Europe (A literature review)," VID Working Papers 2103, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
    19. Wolfgang Auer, 2018. "Empirical Essays on the Socioeconomic Consequences of Economic Uncertainty," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 79.
    20. Gianluca Cerruti & Gianluca Mazzarella & Mauro Migliavacca, 2023. "Employment protection legislation and household formation: evidence from Italy," Review of Economics of the Household, Springer, vol. 21(3), pages 913-939, September.
    21. repec:hum:wpaper:sfb649dp2016-042 is not listed on IDEAS
    22. Chiara L. Comolli & Daniele Vignoli, 2019. "Spread-ing uncertainty, shrinking birth rates," Econometrics Working Papers Archive 2019_08, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
    23. Arianna Gatta & Francesco Mattioli & Letizia Mencarini & Daniele Vignoli, 2019. "Employment Uncertainty and Fertility Intentions: Stability or Resilience?," Econometrics Working Papers Archive 2019_12, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
    24. Kelvin K. C. Seah, 2018. "The effect of immigration shocks on native fertility outcomes: evidence from a natural experiment," IZA Journal of Migration and Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 8(1), pages 1-34, December.

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