J Popul Econ (1992) 5:319-341 --Journal of Population Economics © Springer-Verlag 1992 The effects of financial markets and social security on saving and fertility behaviour in Italy* Alessandro Cigno 1 and Furio C. Rosati 2 1Faculty of Political Science, University of Pisa, 1-56126 Pisa, Italy 2Faculty of Economics, University of Rome-TorVergata, 1-00100 Rome, Italy Received October 1, 1991 / Accepted July 1, 1992 Abstract. The paper aims to ascertain the extent to which saving and fertility deci- sions are affected by the availability and attractiveness of market-based or state- provided alternatives to the family as a source of old-age support. Subordinately, the paper aims to bring evidence to bear on the assumption that fertility is en- dogenous and jointly determined with saving, and to test two alternative hypothe- ses about individual motivations. The saving and fertility implications of two alternative models of family choice - based one on the assumption of pure self- interest, the other on that of intergenerational altruism - are first derived theoretically. Saving and fertility equations are then estimated from Italian time- series data, using as explanatory variables the market rate of interest, the social security deficit, various measures of capital market accessibility and social securi- ty coverage, and a number of income and wage variables. Particularly worthy of note is the result that a fully-funded increase in social security coverage raises sav- ing, while an increase in the social security deficit has the opposite effect. The em- pirical findings appear to support the assumption that fertility is endogenous and jointly determined with saving, and to favour the hypothesis that individual deci- sions are motivated by self-interest rather than intergenerational altruism. Some of the policy implications are briefly discussed in the concluding section. 1. Introduction This paper outlines the relevant theory and presents some empirical evidence on the effects of capital market developments and social security coverage on fertility and saving behaviour in Italy. In contrast with the usual approach to the analysis of saving behaviour, whereby demographic variables are taken to be exogenous * While retaining responsibility for any errors, the authors wish to thank Carlo Casarosa, Wolfram Richter, Ed Wolff and three anonymous referees for helpful comments. Financial support from MURST 40%, under national project "Capitale, Capitale Umano, Sicurezza Sociale e Dinamiche Demografische Endogene", is gratefully acknowledged.