Italy’s demographic trap: voting for childcare subsidies and fertility outcomes

In this paper we study how population aging impacts the age distribution of the voting electorate and voters’ choices over childcare subsidies. We build a computable general equilibrium life-cycle economy that is calibrated to match economic and population outcomes of the Italian economy. The model is populated by heterogenous agents who make endogenous and age-dependent fertility choices. Child support favors young and fertile cohorts but can also impact all population subgroups through changes in prices, income taxation and population growth. A probabilistic voting model is used to measure voting outcomes over a range of childcare subsidy levels and tax policies. Our findings show that childcare subsidies have a positive impact on the total fertility rate and are welfare improving when financed with both capital and labor income taxation and in combination with lower pension contribution rates. A 10 percent increase in the level of childcare can increase the population growth rate by an average of 0.53-0.70 percentage points. At the same time, we find that voting choices of different population subgroups, while depending on the tax used to finance new expenditure, lead to lower levels of childcare subsidies, lower fertility rates and to a demographic ’trap