Do Financial Incentives Affect Fertility?

This paper investigates empirically whether financial incentives, and in particular governmental child subsidies, affect fertility. We use a comprehensive, nonpublic, individual-level panel dataset that includes fertility histories and detailed individual controls for all married Israeli women with two or more children from 1999-2005, a period with substantial variation in the level of governmental child subsidies but no changes in eligibility and coverage. We find a significant positive effect on fertility, with the mean level of child subsidies producing a 7.8 percent increase in fertility. The positive effect of child subsidies on fertility is concentrated in the bottom half of the income distribution. It is present across all religious groups, including the ultra-Orthodox Jewish population whose religious principles forbid birth control and family planning. 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 support the view that fertility responds to financial incentives and indicate that the child subsidy policies used in many countries can have a significant influence on incremental fertility decisions.