Abstract

This paper studies the design of child-care policies when redistribution matters. Traditional mothers provide some informal child care, whereas career mothers purchase full time formal care in the market. The sorting of women across career paths is endogenous and shaped by a social norm about gender roles in the family. Via this social norm traditional mothers' informal child care imposes an externality on career mothers, so that the market outcome is inefficient. Informal care is too large and the group of career mothers is too small so that inefficiency and gender inequality go hand in hand.

In a first-best, full information world redistribution across couples and efficiency are separable. Redistribution is performed via lump-sum transfers and taxes which are designed to equalize utilities across all couples. The efficient allocation of child care is obtained by subsidizing formal care at a Pigouvian rate.

However, in a second-best setting, we show that a trade-off between efficiency and redistributive considerations emerges. The optimal uniform subsidy is lower than the "Pigouvian" level. Under a nonlinear policy the first-best "Pigouvian" rule for the (marginal) subsidy on informal care is reestablished. While the share of high career mothers continues to be distorted downward for incentive reasons, this policy is effective in reconciling the objectives of reducing the child care related inefficiency and achieving a more equal income distribution across couples. This result is robust to different specifications of the social norm.

Light lunch provided for registered participants; please register by September 27, 10:00 a.m. (registration link below seminar title)