Intergenerational transfers: Public education and pensions with endogenous fertility

We consider an overlapping generations economy, where parents are altruistic towards their children, and children provide old-age support to parents. We show that when the education loan market is imperfect, an education subsidy targeted towards achieving the complete-market level of education distorts fertility decisions. However, augmenting the education policy with pension support in the old-age can restore both education and fertility to complete-market level. This highlights that an Education-Pension package is more potent than perceived by the existing literature – it not only replaces the missing credit market but also corrects for fertility distortions. Our results also hold when state intervention in education is justified due to human-capital externality, instead of credit market frictions.