THE GREAT TRANSITION: IMPLICATIONS FROM ENVIRONMENTAL POLICY FOR THE QUALITY-QUANTITY TRADE-OFF IN CHILDREN-REARING

We develop an overlapping-generations model with human capital accumulation and endogenous fertility containing a pollution externality. We study the effects of an environmental policy on individuals' quality-quantity trade-off on children. In a Malthusian poverty trap, we show that a more stringent policy induces a reduction of fertility. In a state of perpetual development, we find a similar result and show that higher environmental quality, growth and welfare are compatible goals. Moreover, we show that the policy can be used as an instrument for initiating a country's great transition from a state of poverty to a state of development.