Wealth composition, endogenous fertility and the dynamics of income inequality

This paper analyzes how differences in the composition of wealth between human and physical capital among families affect fertility choices. These in tum influence the dynamics of wealth and income inequality across generations through a tradeoffbetween quantity and quality of children. Wealth composition affects fertility because physical capital has only a wealth effect on number of children, whereas human capital increases the time cost of child-rearing in addition to the wealth effect. I construct a model combining endogenous fertility with borrowing constraints in human capital investments, in which weaIth composition is determined endogenously. The model is calibrated to the PNAD, a Brazilian household survey, and the main findings of the paper can be summarized as follows. First, the model implies that the crosssection relationship between fertility and wealth typically displays a U-shaped pattem, reflecting differences in wealth composition between poor and rich families. Also, the quantity-quality tradeoff implies a concave cross-section relationship between investments per child and wealth. Second, as the economy develops and families overcome their bOlTowing constraints, the negative effect of weaIth on fertility becomes smaller, and persistence of inequality declines accordingly. The empirical evidence presented in this paper is consistent with both implications .

Why banks want to be complex

We investigate whether and how bank complexity affects performance and systemic risk. We base the analysis on a complexity measure that captures diversification and diversity, controlling for size and other bank characteristics. We find that more complex banks exhibit a higher profitability, lower risk, and higher market share. Moreover, we show an inversely U-shaped relation between bank complexity and banks’ sensitivity to systemic shocks. The evidence challenges the view that higher bank complexity is per se bad and is consistent with theoretical models that show that diversity in the banking system is critical for financial stability.