Yoon 1019

Investment in Childrens Human Capital: Implications of PROGRESA
Yoonyoung Cho November 2004 University of Wisconsin, Madison
Abstract: This paper investigates the eects of an educational subsidy program in Mexico, PROGRESA, on investment in childrens human capital. I develop a dynamic behavioral model to pursue three objectives. First, I quantify the eect of the subsidy on schooling and human capital accumulation. Second, I investigate how the eects vary by household and individual characteristics. Third, I draw policy implications using the model and empirical estimates from it. My model shows that when parents use childrens earnings as a general source of household income, either under a borrowing constraint or impure altruism, parents under-invest in childrens education. An educational subsidy program such as PROGRESA can mitigate this ineciency and increase educational attainment. The model suggests that the positive eects of the subsidy are greater for children from larger families and for older female children. These model predictions are conrmed in the empirical estimates. Moreover, I use the model and underlying parameters to conduct policy experiments and nd that an educational subsidy program that applies dierential subsidy rates by ability and family size can be more eective in reallocating resources to encourage human capital accumulation. JEL Classication: J24, I21, H52. Keywords: Human capital accumulation, schooling, subsidy.
This paper owes an enormous debt of gratitude to John Karl Scholz and Ananth Seshadri for constant support and encouragement. Robert Haveman and Barbara Wolfe made valuable comments. I would like to thank all seminar participants at the University of Wisconsin, Northern Illinois University and the University of Bualo. Department of Economics, 1180 Observatory Dr., Madison, WI 53706, email:yoonyoungcho@wisc.edu
I. Introduction
Increasing formal education is considered by many to be a way to reduce child labor, alleviate poverty, and, in the long run, contribute to the growth of the whole economy. For these reasons, education has received a great deal of attention. Despite this attention, however, individual households may not be able to invest enough in childrens human capital. Especially in developing countries, child labor and poverty is considered to be a main deterrent of education. Consequently, policy makers in these countries have implemented interventions to encourage human capital accumulation. The educational subsidy program PROGRESA1 in Mexico has been recognized as a policy that successfully encourages school attendance among low income households children in the countrys rural areas. Much research has been devoted to evaluating the eects of the program on numerous aspects of household behaviors, including schooling decisions. These studies show there is a signicant increase in schooling due to the program. For example, Schultz (2000, 2001) nds that there is a signicant eect of PROGRESA on increasing school enrollment. The analysis is based on a comparison of households before and after program participation and the localities where the program does and does not take eect. Although this dierence-in-dierence analysis clearly shows the eects, it is limited in that it does not provide the answer to how eective the program is, nor can the estimates be useful directly to explain what would happen when the policy is changed. To investigate PROGRESAs eectiveness, I address the more fundamental questions of what determines childrens schooling in the household, what are the factors that induce the governments intervention into the educational decision, and how can a subsidy program improve them? In an attempt to answer these questions, I develop a dynamic model in which childrens human capital accumulation is determined from the parents perspectives. The human capital production and the optimal decision process follows Ben-Porath (1967), which endogenizes the schooling decision considering the human capital production function. Moreover, I incorporate parents as a decision maker so as to capture the households eect on the decision of childrens human capital. In my model, parents are assumed to be altruistic in the sense that they care about childrens income, which consists of childrens earnings and parents transfers to children. As a result, the nal stock of human capital aects the decision makers utility. Capital market imperfection and a subsidy program are added to characterize poor households and the policy environment in rural areas of Mexico.
A Spanish acronym for Programa Nacional de Educacion, Salud y Alimentacion, which means national program for education, health and nutrition.
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Human Capital and Schooling
Parents determine a childs time investment in human capital accumulation until the child becomes independent and leaves its natal household. A childs time is allocated between human capital accumulation and earnings-generating activity. Since childrens labor earnings are contributed to the households budget, parental investment in a childs human capital depends on how productive the child is, how much the parents rely on the childs earnings, and how altruistic the parents are towards the child. A childs productivity depends on his or her ability. The extent to which parents rely on the childs earnings depends on the exibility of the capital market and parents lifetime income ow. By the time the child is independent and no longer pools its earnings into the parents budget, the human capital that the child has accumulated will determine his or her lifetime earnings. Since parents are altruistic and care about the childs income, parents will make a cash transfer to the child if they can and if it is needed. Thus, in every period, when determining a childs time allocation, parents mainly consider two factors about the childs human capital: one is the amount of labor earnings that the child contributes to the household budget, and the other is the parents altruism, which considers the childs future earnings. My model considers factors that generate under-investment in human capital compared to the social optimum. One of these are capital market imperfections that restrict parents from borrowing against their future income. For this reason, parents put more value on current consumption, and thereby use childrens earnings, which reduces investment in their childrens human capital. Another source is the fact that parents are making schooling decisions on behalf of their children. Since parents are not able to extract a grown childs earnings, they do not fully consider the lifetime earnings of the child. In addition, impure altruism reduces the extent to which parents care about childrens future income. There are several previous analyses that examine PROGRESA. Among them, Attanasio, Meghir and Santiago (2001) and Todd and Wolpin (2003) endogenize the schooling decision and analyze the subsidy eects of PROGRESA on schooling. In Attanasio, Meghir and Santiago (2001), the decision maker chooses schooling so as to maximize the childs lifetime earnings, which are assumed to be a quadratic function of the years of schooling of an individual. Since the decision maker is already assumed to be maximizing lifetime earnings, the model does not provide any reason why the government intervenes to change the outcome of the decision. However, schooling level of governments intervention and analysis is mainly primary or secondary school, where parents are more likely to make decisions on their behalf. If parents educational investment decisions diers from maximizing each childs lifetime earnings, estimates of the schooling decisions that ignore the contradictions discussed here will
be biased. As mentioned above, in my model, parents are likely to under-invest in childrens human capital. In another study, Todd and Wolpin (2003) addresses parents decisions concerning fertility and childrens schooling. They model parents utility as a function of diverse arguments including childrens activities of either working, schooling, or staying home. The parameters of each argument, which reect parents preferences for it, are allowed to vary with childrens gender and age according to the household characteristics. Grown children are assumed to have no interaction with parents in the sense that they do not pool their income into household budget and parents utility does not include any characteristics of their grown children. Therefore, the positive incentive for parents to invest in childrens human capital here is solely dependent on parents preference for schooling. However, Todd and Wolpins model is not explicit in the reasons why parents might derive dierent utility from the schooling of children with dierent characteristics, even after controlling for the dierences in labor earnings. My model takes a dierent approach by specifying human capital accumulation. Households face borrowing constraints and the more these constraints bind, or the less altruistic the parents are, the lower the parents investment in childrens human capital. When the subsidy is introduced, it mitigates parents under-investment by increasing childrens time investment in human capital. The eects of subsidy are expected to vary by household and individual characteristics, and so does the educational decision. Specically, I focus on the educational decision and subsidy eects on children from dierent sizes of families and of dierent genders. My model and its empirical test nds that larger households are more borrowing constrained and therefore produce less education for their children. Subsidies, however, have greater eects on households with more children than for households with fewer children. I also test and reject the hypothesis that the gender dierence in education might be due to parents unequal altruism. The eects of the subsidy are the same across genders for primary school education, and are greater for female than male children for secondary school. The paper is organized as follows. In the next section, I describe the data used, including the details of the program design and some descriptive statistics. Section 3 presents a dynamic model through which parents decide educational investments in children. Section 4 calibrates the model, presents the outcomes and discusses policy implications. Section 5 empirically tests the validity of the model by analyzing the eects of PROGRESA on schooling. In section 6, based on the model, I conduct policy experiments to examine ways that policy goals can be more eectively achieved. Section 7 concludes.
II. Data and Descriptive Analysis

IIa. Program Design and Data PROGRESA began in 1998. It targets poor households in rural areas and provides subsidies for selected households conditional on childrens school attendance and regular visits to a health care clinic. The purpose of the program is to create incentives for poor households to invest in the human capital of their children. For this purpose, PROGRESA includes two components: a health and nutritional program and an educational subsidy program. The health and nutritional component of the program provides mothers and infants with regular health care, and conditional on the observance of the required health check-ups, it also provides nutritional supplements. The educational component of the program includes subsidies for parents who send their children to school. A recent appraisal of PROGRESA shows that the program is growing. By the year 2000, almost 40% of all rural families are covered by this program, which amounts to 20% of the federal budget allotted to social programs and to 0.2% of the GDP. The Mexican government is currently considering extending the program to urban areas.2 There are two notable aspects of PROGRESAs design. One is that the subsidies are contingent on school attendance. The other is the social-experimental aspect of random assignment that determines which localities will take part in the program. PROGRESA is introduced sequentially to program localities rst and to others later. The selection of program localities and eligible households, and the corresponding data collection process is as follows. Localities, where a high proportion of households are living in extreme poverty in seven Mexican states, are selected. According to the sequential expansion of the program, among the chosen 6,396 localities, 4,546 of them are covered by the rst phase of the program and the other 1,850 localities are covered by the later phases. Based on a households economic situation, poor households are designated to be eligible for this program.3
The Mexican government changed the name of PROGRESA to Oportunidades but retained the programs main elements. 3 The beneciary households are selected by the following three steps. First, the poverty condition comparing the families monthly income per capita and the cost of a basic food basket is estimated. In addition to the approximate poverty condition, the classication is conducted according to the households characteristics, which classies the households either in extreme poverty or not in extreme poverty. Finally, taking account of regional dierences and incorporating the poverty conditions, the eligible households are selected. For detailed process about dening poverty and selecting eligible households, see Skouas, Davis and Behrman (1999).
2
According to the structure of the program, corresponding samples are randomly selected from each locality. These consist of 320 treatment localities, which represent the program localities where the program is introduced in the rst phase, and 186 control localities, which serve as a control group in which the program is not introduced during the period of this analysis. Each survey covers both eligible and non-eligible households. The data I use include the 1997 census, the March 1998 baseline survey before the program onset, and three evaluation surveys conducted in November 1998, June 1999, and November 1999, after the program was introduced. Each data set contains individual information such as demographic characteristics and school attendance, household information including family composition and income, and locality information, such as the presence of schools. These data sets, tracking the same households and individuals in eligible and non-eligible households in both the treatment and the control localities, form a short period panel and serve as a main data for analysis. Since there is attrition in the data,4 only those individuals covered by at least two data sets are used for the analysis. IIb. Descriptive Analysis PROGRESA Once the household in the program locality is designated an eligible household,5 they can participate in the health and nutritional and/or the educational component according to the ages of the children. The health and nutritional component usually provides health service to women and infants, while the educational component subsidizes households with children aged from eight to sixteen. For the purpose of this analysis, however, only the educational component of the program is considered. The conditional subsidy for schooling provides an exogenous shift of the costs of education, where subsidy rates dier across the gender and the ages of children. Table 1 summarizes the amount of scholarship that the participating households receive.6 At the ages of six or seven, children usually enter primary school. To provide a greater incentive to the parents of older and female children, the amount of subsidy increases with age and is slightly higher for female children. The subsidy amount for secondary school is much higher, in order to encourage more children to progress from primary to secondary school.
In particular, the second baseline survey only covers children ages six through sixteen in the schooling segment of the data, and the number of observations is far less than the other data sets. The other data sets usually have information about all members in the household. 5 About 78 percent of the sample is identied as eligible for PROGRESA. 6 The subsidy varies by grade, but is not contingent on age.
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Human Capital and Schooling Table 1: Payments in Pesos per Month for School Attendance under PROGRESA.
Educational Level Corresponding Age 8-9 9-10 10-11 11-12 12-13 13-14 15-16 Male Child 71 81 107 138 204 214 230 Female Child 71 81 107 138 214 240 260
Primary
3rd grade 4th grade 5th grade 6th grade
Secondary
1st grade 2nd grade 3rd grade
Source: Schultz (2000, Table 1) All values in 1998 pesos.
Child Labor The opportunity cost of sending children to school is the foregone labor earnings from work.7 Table 2 shows the average earnings of children in the labor market by gender and age. Although not a great number of children under fourteen work and the earnings data is noisy, earnings from child labor are not trivial, considering that the average monthly earnings of working adults over 17 years old are approximately 800 pesos. Child labor, despite its illegality, is the main reason why children do not attend school.8 Children aged from thirteen to sixteen, who are usually enrolled in secondary school, show a higher tendency to participate in the labor market and have substantial earnings that increase steadily with age. Due to the increasing opportunity cost, the school enrollment rate for children decreases quickly as children age. Table 3 shows the school enrollment rates for each age and gender in the 1997 census, before PROGRESA began. Since a number of children drop out of school to work in the labor market or to participate in home production, the enrollment rate for older children is very low.
The Federal Labor Law in Mexico establishes age fourteen as the basic minimum age for work. Those children under age eighteen are required to have permission from a legal guardian or parent in order to work. In addition to that, primary and secondary education in Mexico is mandatory. However, government enforcement is far from strict and is only applied in the formal sector, while a great number of children are working for a family business or in the informal sector. 8 The earnings in this table are only the observed ones of those who work in the labor market and reported to the survey. If working in the informal and non-paid market, or participating in home production are counted, the opportunity cost of schooling would be larger.
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Human Capital and Schooling Table 2: Child Labor and Average Monthly Earnings of Working Children.
Male Age 8 9 10 11 12 13 14 15 16 N of Observations 1,478 1,720 1,933 1,760 1,723 1,754 1,760 1,745 1,601 N of Working 23 24 25 44 93 167 283 585 643 Monthly Earnings 460 358 517 359 528 516 596 675 707 N of Observations 1,762 1,700 1,813 1,798 1,727 1,697 1,626 1,623 1,442 Female N of Working 5 9 13 16 35 58 82 193 201 Monthly Earnings 195 269 210 479 405 477 535 619 651
Source: PROGRESA, 1997 Census data. Earnings are in 1998 pesos.
The reduction in enrollment rate for older female children is even greater than it is for older male children. Consequently the average years of schooling of adults between age seventeen and forty in the data are 5.1 and 4.6 years for men and women, respectively. If adults older than forty are included, the average years of schooling of men and women are 3.8 and 3.2 years respectively. The average years of schooling increases and the gap between men and women decreases in younger generations.
Table 3: School Enrollment Rates (%).

Age Male Female 6 88.2 (3.2) 87.2 (3.3) 7 92.2 (2.6) 92.2 (2.6) 8 94.3 (2.3) 94.1 (2.3) 9 94.5 (2.2) 94.9 (2.0) 10 93.3 (2.4) 93.6 (2.4) 11 92.5 (2.6) 91.7 (2.7) 12 84.9 (3.5) 78.0 (4.0) 13 75.1 (4.3) 65.3 (4.7) 14 60.1 (4.8) 50.0 (5.0) 15 43.5 (4.7) 35.3 (4.3) 16 33.5 (4.7) 24.7 (4.3)
Source: PROGRESA, 1997 Census. The standard deviations are in parentheses. Number of observations: male=19,778 and female=18,835.
Returns to Schooling The main incentive for parents to invest in childrens education is that childrens earnings increase.9 Therefore, parents have an incentive to invest in childrens human capital as long as
Many papers are devoted to estimate the increase in earnings due to the increase in education, as returns to schooling: e.g. Mincer (1974), Wills (1986), and Card (1999).
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childrens earnings augment households budget. In addition, if the parents are forward looking and altruistic, in the sense that they care about their childrens income in the future, they will also invest in childrens schooling. Consider Table 4 which summarizes the distribution of educational attainment and the mean age, labor force participation and monthly earnings for each educational level by gender. Educational attainment is categorized as no education, less than primary, less than secondary, secondary, tertiary, and post tertiary education.10 As suggested in the table, education is positively correlated with earnings. Nevertheless, the majority of people living in rural areas of Mexico have less than primary education. Although younger generations seem to obtain morer education, their educational attainment is still low, and only about ten percent go beyond the secondary level. Table 4: Age, Labor Force Participation (LFP) and Earnings by Educational Attainment.
Men Last Grade Achieved No Education Less than Primary Less than Secondary Secondary Tertiary Post Tertiary Total % 23.5 40.4 24.0 9.9 1.7 0.6 100.0 Age 52 42 28 24 27 33 39 LFP 76.9 86.2 84.3 76.2 69.4 81.6 82.2 Earnings 650 772 881 970 1,398 2,319 808 % 33.9 34.9 21.8 7.8 1.3 0.4 100.0 51 39 26 23 25 30 39 Women Age LFP 11.8 13.2 18.0 21.9 35.0 54.5 13.9 Earnings 502 620 803 895 1,725 2,170 661
Source: PROGRESA, 1997 Census. Number of observations: men=33,198 and women=33,279
Other Factors There are number of other factors that might aect parents decisions on childrens education. For example, old age support may be a reason that parents invest more in sons than daughters,
Primary education, which corresponds to the Primaria in Mexico, is equivalent to elementary school in the U.S. Children often attend Preescolar (Preschool) or Kinder (Kindergarten) before going to Primaria. Thus, Less than Primary Education includes those who have attended Preschool, Kindergarten, or elementary school and fail to nish elementary school. Secondary education, corresponding to Secundaria in Mexico, is a three year course similar to junior high school. Less than Secondary includes secondary school dropouts, and Secondary includes those who graduated from secondary school. There are two dierent kinds of tertiary institutes. Normal Basica is a job-preparation technical institute, while Preparatoria is equivalent to U.S. high school education. Tertiary includes those who graduated from either one of these institutes. The post tertiary education includes those who nish Profesional which is college level, and Posgrado which is equivalent to a masters degree and above.
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or the rst born child than the others. However, the remittances patterns that grown children provide for their parents are not available from the PROGRESA data set. To get some idea of this pattern, I examine an auxiliary data set, the Mexican Health and Aging Study (MHAS).11 According to these data, in less urban areas of Mexico, the proportion of grown children making reverse transfers to their aged parents is around 5.1% overall, when the households of children are poor. Although the denition of poor households in the data set is not rigorously dened and rather depends on parents subjective perceptions, nancial support from children does not seem to be of great importance. Some studies use parental preferences to explain the educational outcomes of each child and the dierences of these outcomes across children. Todd and Wolpin (2003), for example, nds that parents derive dierent utility across children even when the children engage in the same activity. Behrman, Pollak, and Taubman (1986) nds that parents have equal concern for sons and daughters, or when returns to education in the marriage market are incorporated slightly prefer daughters. However, in this analysis, I focus on human capital as a main channel that aects parents decisions rather than considering dierential parental preferences towards each child.
III. Analytical Framework

I develop a dynamic model to investigate how parents invest in childrens education. In this section, the description of the basic model, its solution and implications follow. IIIa. Model Suppose the life of the economic agent consists of three phases: childhood, young adulthood, and old age. The decision process of each phase is summarized as follows. Childhood: No direct decision is made by the agent. During this period children are under the parents control, depend on their parents for their schooling decisions, and pool their income to augment the household budget. Young Adulthood (young parent): From period t = 0 to period t = T 1 the economic agent makes decisions about consumption (savings) and their childrens human capital accumulation. The households budget is the sum of the parents and childrens income, if the children work.
The MHAS is conducted by the National Institute for Statistics, Geography and Information Technology, in alliance with universities in the U.S., including the University of Pennsylvania. They survey individuals over age 55 and focus mainly on their health.
11
10
Old Age (old parent): From period t = T , when the child now becomes young adult himself or herself, to period t = D, the end of an agents life, the agent decides on its optimal consumption path given accumulated assets from previous periods. During this period, the independent childrens decision does not aect parents budgets nor utility. Altruistic old parents, however, derive positive utility from their childrens general wellbeing, which will depend on childrens income level determined from the previous periods.
Formally, an economic agents decision problem throughout life is maximizing the sum of the present stream of discounted utility of each period, from young adulthood to old age. Let B (AT , HT , F ) be the value obtained from time T onwards, which depends on accumulated assets AT , childrens human capital HT by the time t = T , and the amount of transfer from parents to children F .12 Note that the agent begins young adulthood, with his or her human capital and initial assets already decided by his or her parents. The lifetime decision problem that the parents face through young adulthood to their old age, dened as W (E + A0 ) is,
T 1
W (E + A0 ) = max
t=0
t u(Ct ) + T B (AT , HT , F )
(1)
s.t. Ct +
N
Ckt + At+1 Et +
k=1 N k=1 N
Ekt + (1 + r)At , Ekt + (1 + r)At ,

k=1
t = 0, ..., T 2, t=T 1
Ct +
k=1
Ckt +
k=1
Fk + At+1 Et +
where W (E + A0 ) is some function of parents wealth, a sum of earnings (E ) and initial assets (A0 ), is a discount rate, N is the number of children, and r is risk-free interest rate. The utility function has the usual properties including u () > 0 and u () < 0. Parents earnings are determined by their human capital which are already determined from the previous generation: Et is exogenous. The budget constraint shows that current parents consumption plus childrens consumption, Ct +
N k=1
Ckt , and savings for the next period, At+1 , cannot exceed the sum of
N
parents income, Et , aggregate childrens income,
(1 + r)At . At t = T 1, parents also make decisions about how much transfer they will make to each child (Fk ).
Ht and F denote the aggregate human capital stock and transfer of each child at time t so that Ht = {H1t , ..., HN t }, and F = {F1 , ..., FN } , where N is the total number of children in this household.
12
k=1
Ekt , and savings from the previous period,
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Each childs earnings consists of potential labor market earnings and subsidies for education provided by the government. The childs labor earnings depend on the stock of human capital accumulated thus far and the market time of labor, while the government provides subsidies for non-market time used for education to compensate for the loss of labor earnings due to human capital accumulation. Subsidies are set at some proportion of potential wage earnings. Thus the childs earnings which are composed of potential wage earnings and governments subsidies are specied as Ekt = (1 Ikt )Rt Hkt + Ikt Rt Hkt where Ikt is the proportion of time spent accumulating human capital, Rt is the rental rate for human capital, Hkt is the current stock of human capital and (0, 1) is a subsidy rate. A child is costly but not as costly as an adult, so childrens consumption is scaled so that
N k=1
Ckt = (N )Ct where (N ) is an equivalence scale depending on the number of children in
the household.13 Then the problem is to make the optimal decision for consumption paths (Ct ), the proportion of time spent accumulating human capital for each child (Ikt ) and transfers to each child (Fk ), considering future utility. Formally, equation (1) is specied as
T 1
W (E + A0 ) =
Ct ,{Ikt },Fk
max
t u(Ct ) + T B (AT , HT , F )
t=0 N
(1 )
s.t. Ct (1 + (N )) + At+1 Et +
k=1
{(1 Ikt )Rt Hkt + Ikt Rt Hkt } + (1 + r)At (at t = 0, ..., T 2)
Ct (1 + (N )) +
k=1
Fk + At+1 Et +
k=1
{(1 Ikt )Rt Hkt + Ikt Rt Hkt } + (1 + r)At (at t = T 1).
In terms of the process of human capital accumulation, I adopt a standard production function following Ben-Porath (1967) such that Ht+1 = (1 )Ht + 0 (It Ht )1 , (2)
where It Ht is eective time for human capital production, 0 > 0 is an ability parameter, 1 < 1 reects returns to scale and is the depreciation rate of human capital. The initial human
Deaton and Muellbauer (1986) introduce the concept of equivalence scale. The equivalence scale satises the following properties: (N ) > 0 and (N ) < 0.
13
12
capital level H0 > 0 is assumed to be exogenously given from parents educational attainment determined by the previous generation. Looking into the human capital production function and the budget constraint, there is a trade o between current labor earnings and accumulating more human capital. So the parents decision is to determine when they should utilize childrens accumulated human capital. Additional accumulation of human capital of a child provides parents not only with more labor earnings when the child works, but also with positive utility for the parents old age. Next, the the economic agent in old age (from t = T, ..., D) is described as follows. The problem faced in old age at time t = T is to nd optimal consumption paths for the remainder of life. The total utility in this period includes the utility derived from the childs human capital. However, parents are assumed to have impure altruism which means they care less about the child than themselves: the utility derived from a childs income is discounted by .14 The sum of discounted utility from t = T onwards is
D N
B (AT , HT , F ) = max
Ct t=T
tT
u(Ct ) +
k=1
W (RT HkT + Fk )
(3)
= b(AT ) +
k=1
W (RT HkT + Fk )
s.t. Ct + At+1 Et + (1 + r)At , t = T, ..., D 1, CD = ED + (1 + r)AD , t = D, where (0, 1) is an altruism factor and W (RT HkT + Fk ) is the utility that parents derive from the childs wealth. The continuation value from an optimal consumption decision for the rest of life in old age can be specied as b(AT ), a function of asset level at time t = T . (See Appendix A for a derivation.) IIIb. Model Solution To solve the dynamic problem described above, I rewrite the problem in recursive form using the Bellman equations and solve it using backward induction. Note that the parents start an old phase of lives and child starts his or her own adulthood at time t = T . Given the value of T onwards, I solve the problem from the last period of parents decision at t = T 1. At t = T 1, parents decide the level of consumption, the fraction of time investment spent accumulating human capital and transfer to each child.
Aiyagari et al. (2002) also investigates the implication of impure altruism in terms of the eect on investment in childrens human capital and bequests.
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Human Capital and Schooling Solutions at t=T-1 The problem that the young parent faces at time T 1 is
N
13
vT 1 (AT 1 , HT 1 , F ) =
N
AT ,{HkT },{Fk }
max
u(CT 1 ) + {b(AT ) +
k=1 N
W (RT HkT + Fk )}
s.t. CT 1 (1 + (N ))+
k=1
Fk +AT ET 1 +
k=1
{(1IkT 1 )RT 1 HkT 1 +IkT 1 RT 1 HkT 1 }+(1+r)AT 1 .
Since determining current time investment in human capital production is equivalent to determining the next periods stock of human capital from the human capital production function, I solve the problem with respect to HkT instead of IkT 1 . Then the choice variables are HkT , Fk and AT , and the rst order necessary conditions with respect to each of them are IkT 1 u (CT 1 ) RT 1 HkT 1 (1 ) = RT W1 (RT HkT + Fk ) 1 + (N ) HkT
HkT : Fk : AT :
(4) (5) (6)
u (CT 1 ) = W1 (RT HkT + Fk ) 1 + (N ) u (CT 1 ) = b1 (AT ). 1 + (N )

IkT 1 HkT
Rearrange equation (4), replacing HkT :
from the production function of human capital. (4 )
1 u (CT 1 ) RT 1 (1 ) HkT (1 )HkT 1 1 ( ) 1 = RT W1 (RT HkT + Fk ). 1 + (N ) 0 1 0
These equations present the simple rule of equating the marginal cost and benet in determining each choice variable. The left hand side of equation (4 ) is the marginal cost of human capital accumulation, which is the utility loss from losing current earnings. The right hand side of it is the marginal benet, which is the utility gain from the additional income of each child. The marginal cost of accumulating assets and making transfers to children are utility loss from giving up consumption. The marginal benets of each are discounted utility from increased old age consumption and increased childrens income. Solutions at t=T-2,...,0 The dynamic problem that the young adults face during t = 0, ..., T 2, is vt (At , Ht , F ) =
{Hkt+1 },At+1
max
u(Ct ) + vt+1 (At+1 , Ht+1 , F )
(7)

N
14 {(1 Ikt )Rt Hkt + Ikt Rt Hkt } + (1 + r)At , t = 0, ..., T 2.

k=1
s.t. Ct (1 + (N )) + At+1 Et +
The rst order necessary conditions for each variable Ht+1 and At+1 are15 Hkt+1 : At+1 :
1 u (Ct ) (1 )Rt Hkt+1 (1 )Hkt 1 ( ) 1 = vHk ,t+1 (At+1 , Ht+1 , F ) 1 + (N ) 0 1 0
(8) (9)
u (Ct ) = vA,t+1 (At+1 , Ht+1 , F ). 1 + (N )
The Envelope conditions are vHk ,t (At , Ht , F ) = vA,t (At , Ht , F ) =

1 u (Ct )Rt (1 )(1 ) Hkt+1 (1 )Hkt 1 ( ) 1 } {1 + 1 + (N ) 0 1 0
(10) (11)
u (Ct )(1 + r) . 1 + (N )
Combining equations (8) and (10) determines the solution for human capital, which is
1 u (Ct ) (1 )Rt Hkt+1 (1 )Hkt 1 ( ) 1 1 + (N ) 0 1 0 1 (1 )(1 ) Hkt+2 (1 )Hkt+1 1 u (Ct+1 )Rt+1 {1 + ( ) 1 }. 1 + (N ) 0 1 0
(12)
Similarly, combining equations (9) and (11) yields the familiar Euler equation, u (Ct ) = (1 + r)u (Ct+1 ) which simplies equation (12) to16
1 1 (1 )(1 ) Hkt+2 (1 )Hkt+1 1 (1 + r)(1 ) Hkt+1 (1 )Hkt 1 ( ) 1 = 1+ ( ) 1 . (14) 0 1 0 0 1 0
(13)
Equations (12) and (14) show that the marginal cost (benet) of human capital accumulation is the loss (gain) of labor earnings that depends on educational attainment, and it should be expressed in terms of utility loss (gain) as in equation (12). With perfect capital markets, however, where the discounted marginal utility of consumption over time is constant, the decision is equivalent to equating the monetary marginal cost and benet as in equation (14).
15 16
Let vHk ,t (At , Ht , F ) denote the partial derivative of value function vt (At , Ht , F ) at t, with respect to Hkt . Assume that Rt = R for all t.
Human Capital and Schooling IIIc. Model Implication and Comparative Statics
15
There are two ways in which the educational decision described in the model may be considered as under-investment, which the government aims to improve with subsidies. First, parents investment in childrens human capital is less than the investment that the children would have made for themselves. Second, the borrowing constraint reduces the investment in human capital. Parents vs. Childrens Decision My model suggests that schooling decisions made by parents on behalf of children may not be optimal because the decisions are dierent from what would have been made by children themselves. The discrepancy between parents and childrens own decisions are larger when parents altruism is impure. Clearly, parents consider b(AT ) + W (RT HkT + Fk ) at time t = T 1 as a future value. Parents concern for childrens income is currently reected only in W (RT HkT + Fk ). However, if children become the decision maker and their lifetime utility for the remainder of life are considered instead, then the educational attainment would be larger.17 Thus, in the environment where parents use childrens earnings as a general source of income, parents decision on behalf of children for their human capital results in less education because parents do not fully consider childrens lifetime utility. Borrowing Constraints A borrowing constraint is another source of under-investment in childrens human capital. Without borrowing constraints, the economic decision maker smoothes the consumption according to the Euler equation (13). However, if borrowing is constrained, the Euler equation holds only when At+1 > 0. Otherwise, u (Ct ) > (1 + r)u (Ct+1 ), which implies the decision maker values current consumption more than discounted future consumption. Thus, the borrowing constraint increases current consumption and reduces future consumption by reducing educational investment in children.
17
Specically, the future value at t = T 1 is k b(AT ) + W (RT HkT , Fk ), where k is the childs altruism toward
D Ct t=T
parents. The lifetime utility for the remaining life for the child is W (RT HkT , Fk ) = max budget constraint that
D t=T Ct (1+(Nk )) (1+r )tT Q
tT u(Ct ) with the
=
t=T
RT HT (1+r )tT
+ Fk , where Nk , D , and Q denote the number of children,
end of life, and retirement of the child, respectively. If the childs altruism toward parents is negligible, and the curvatures of W and W are same, the marginal utility of accumulating additional human capital is much greater in the childs decision than in parents.
16
LHS
RHS
H Hkt +1 kt+1
Hkt+1
Figure 1: Determination of Human Capital Stock

the effect of a borrowing constraint
Figure 1 illustrates the human capital accumulation with and without borrowing constraint. The two curves present the monetary marginal cost of human capital accumulation (LHS: left hand side) and marginal benet (RHS: right hand side) in equation (14).18 Without borrowing constraint, equating monetary cost and benet determines optimal human capital at Hkt +1 . However, when borrowing constraint is imposed and u (Ct ) > (1 + r)u (Ct+1 ), satisfying equation (12) requires greater monetary benet in the next period to compensate for the lower utility . of consumption. Thus the optimal level is reduced to Hkt +1 As suggested above, parents investment in childrens human capital falls short of the optimal level and the under-investment is worsened due to the credit constraints. I will examine the
18
When 1 > 0.5, it is shown that
LHS Hkt+1
> 0 and
following equations:
2 LHS 2 Hkt +1
< 0, and
RHS Hkt+1
< 0 and
2 RHS 2 Hkt +1
< 0 by the
(1 + r)(1 )(1 1 ) Hkt+1 (1 )Hkt 1/1 2 LHS = ( ) Hkt+1 (0 1 )2 0 (1 + r)(1 )(1 1 )(1 21 ) Hkt+1 (1 )Hkt 1/1 3 2 LHS = ( ) 2 Hkt (0 1 )3 0 +1 (1 )2 (1 1 )(1 ) Hkt+2 (1 )Hkt+1 1/1 2 RHS = ( ) Hkt+1 (0 1 )2 0 (1 )(1 )3 (1 1 )(1 21 ) Hkt+2 (1 )Hkt+1 1/1 3 2 RHS = ( ) 2 Hkt+1 (0 1 )3 0
17
comparative statics of key variables how the credit constraints aect the households decision according to these key variables. First, I consider family size because family size reects the extent to which a household is borrowing constrained. Second, I visit the familiar question of gender gap in education and investigates what my model implies about it. Third, I investigate the eects of constraints according to the ability of a child. Family Size: Number of Children (N) Equation (14) indicates that the decision on human capital is not aected by the consumption level or the number of children in the household when there is no borrowing constraint. The size of household only matters when there is a borrowing constraint. Increasing the number of children is costly in households consumption and makes the household more borrowing constrained, although children may contribute earnings to the household as they get older. My model suggests that children from larger families have lower educational attainment because these households are more borrowing constrained and the opportunity cost of accumulating human capital for these households is greater. This implication will be empirically tested and discussed. Gender: Rental Rate for Human Capital (Rt ) and Altruism Factor ( ) As shown in Table 3, there is a slight dierence in the school enrollment rate across gender. Encouraging female childrens schooling by providing a slightly higher subsidy is to remedy this lower investment in female children. In the model, there are two sources that can induce dierent allocations between genders: the rental rate for human capital and the dierent altruism factor toward each child. The rental rate for human capital Rt is the price of it. Although human capital and the rental rate are not observable, the wages must reect the total price for the stock of human capital paid in the labor market. It is easy to think that the higher rental rate for human capital might induce more human capital accumulation. However, since the higher rental rate for human capital also means the higher opportunity cost of human capital accumulation, whether the higher rental rate results in greater investment in human capital is not obvious. Meanwhile, the greater altruism factor in this model seems to imply greater transfer from parents to the child and greater investment in human capital of the child. Combining equation (5) and (6) clearly shows that greater altruism factor implies greater transfer to the child. The eect of altruism factor on human capital accumulation, however, is not so straightforward. Equations (4 ) and (5) show that the dierent altruism factor does not make a dierence in
18
human capital accumulation as long as parents make a transfer to the child.19 When excluding the case that parents receive a reverse transfer from children, then the altruism factor makes a dierence, with smaller altruism resulting in lower investment in human capital. The price for human capital is the shadow price of education. Although it is not obvious whose rental rate for human capital is valued higher, the dierence in rental rate for human capital between gender can induce dierent educational investment. In addition, dierence in parents altruism toward each gender of children would make dierence. In particular, attention has been paid to whether the dierence in educational outcome by gender is due to dierence in parents altruism.(e.g. Behrman et al. (1986)) In the empirical test, I will revisit this issue. Ability: The Ability Factor (0 ) In the model, one of the most important factors that aect the parents decision about human capital is the ability of a child. The childs ability determines the productivity of accumulating human capital. A higher-ability child is able to accumulate human capital faster with the same time input than a lower-ability one. Then, combined with the larger stock of human capital accumulated, the higher-ability child can accelerate human capital accumulation. The greater the childs ability, the higher the accumulated human capital and the steeper the human capital accumulation. Then the household with a higher-ability child receives more earnings from the child as the child gets older compared to the household with lower-ability child. This means that the consumption smoothing requires more resources for households with higher-ability child than the other counterpart. Therefore, when the households income is low and there is a borrowing constraint, the households with higher-ability would be disadvantaged further by the credit constraint and poverty.20 Without a borrowing constraint, it is obvious from the equation (14) that the time investment in human capital accumulation is monotonic to the ability of a child: a higher-ability child spends more time accumulating human capital. However, with a borrowing constraint, this relationship is no longer apparent. Since a higher-ability child has a higher opportunity cost of accumulating human capital, the higher-ability child may leave quicker for labor market. Thus, whether time investment is monotonic to the childs ability over his or her entire childhood is not obvious.
19
Equations
(5)
and
1
(6)
gives
W1 (RT HkT + Fk )=b1 (AT ),
and
equations
(4 )
and
(5)
gives
= 1. These equations hold only when the amount of transfer from parents to the child is positive. 20 Numerically, the ratio of marginal utility of current and future consumption for households with a higher(Ct ) (Ct ) ability and a low-ability child shows the inequality as [ uu(C ]H > [ uu(C ]L . Then the reduction in human t+1 ) t+1 ) capital accumulation is greater for a higher-ability child as shown in the Figure 1.
1 (1 ) HkT (1 )HkT 1 ( ) 1 0 1 0
19
In this section, I have presented the model and the solution for it, which determines households educational investment in children. The model implies that parents educational decision for children is not optimal. The extent to which the sources of parents under-investment reduces education varies with the family size, gender, and ability of the child. Throughout next sections of calibration and estimation, these implications will be examined, and the dierential subsidy eects according to these key variables will be investigated.
IV. Calibration
Having considered some implications of the factors that aect childrens education, I calibrate the model to further investigate the eects of each factor, its magnitude and the eects of the subsidy. Thus, in this section, I parameterize the model, assume specic functional forms, and present the ndings from the model. IVa. Subsidy Eects
+ Fk ) Assume utility is CRRA: i.e., u(Ct ) = 1t and W (RT HkT + Fk ) = (RT HkT 1 is calibrated using the following parameter values summarized in Table 5. C 1
1
. The model
Table 5: Benchmark Parameter Values. -Discount Factor, = 0.96 -CRRA: Consumption, = 2.0 -CRRA: Childs Income, = 2.0 -Altruism Factor, = 0.3
2) -Ability, 0 log N (, = 0.1, = 0.3 0 = 0.52, 0.70, 0.95, 1.28, 1.73, 2.34 -Return to Scale, 1 = 0.73 -Initial Human Capital, H0 = 100 -Depreciation Rate, = 0.0
Preferences
Production Function
Period of Analysis
-Beginning of Old Age at T , T = 43 -Retirement at Q, Q = 65 -Death at D, D = 75 -Subsidy Rate, = 0.20 -Subsidized Ages of a Child, Age 16 -Gross Interest Rate, r = 1.06 -Equivalence Scale, = 1.05
Educational Subsidy Other Parameters
20
Preferences: The time period of the model is a year and the time discount rate is set at 0.96. For the CRRA utility functions, let the coecient of relative risk aversion of consumption, , assume a standard value of 2.0 and the coecient for human capital stock, , start with 2.0.21 Since there is no theoretical or empirical grounds for the altruism factor, which measures how much parents care about a childs wealth relative to their own utility, let be set to 0.3.22 Human Capital Production: Assume that 0 , which is the parameter of ability, is distributed 2 ). Setting = 0.1 and = 0.3, I calibrate the model as log normal; i.e., log 0 N (, at 6 dierent levels of ability ranging from 0.52 to 2.34.23 The estimate for the depreciation rate and returns to scale parameter varies. For example, Heckman (1976) found the estimate of the Ben-Porath model and his own model gives 0.81 and 0.52 for 1 , and 0.09 and 0.04 for depreciation rate , respectively. I will begin with 1 = 0.73 and = 0.0. For the benchmark case, the initial human capital is homogenous for everyone. Period of Analysis: I assume that the agent is a young parent between the ages of 23 and 43. During this period, between the childs ages of 6 and 22, parents make decisions on time investment in accumulating human capital for children as well their own consumption and asset accumulation. At the parents age of 43, when the child turns into young adult and leaves the natal household, the parents enter the phase of old age. In this phase, they have a positive earnings stream until they retire at age 65. Educational Subsidy: The PROGRESA subsidy is provided to children who enroll in school when they are between the third year of primary school to the third year of secondary school. Therefore, in this simulation, I assume the subsidy is provided for children younger than 16, which is the corresponding age for PROGRESA. The subsidy rate is xed at 20% for all ages. Other Parameters: The real interest rate is set at 6%.24 The equivalence scale is set as a concave function of the number of children in the household. Thus, for a three child household, the = 1.05.25
There are few literature that estimated the coecient of relative risk aversion (the reciprocal of the intertemporal elasticity of substitution) using Mexican data. According to the summary in Reinhart and Talvi (1998), the intertemporal elasticity of substitution in Latin American countries including Mexico range from 0.43 to 0.56. 22 Since there is no standard number for altruism factor, 0.3 is used for illustrative purpose. The eect of impure altruism of parents on a childs human capital accumulation by changing altruism factor will be discussed. 23 This covers 2.5 standard deviations from the mean. 24 According to the report by the Ministry of Finance and Public Credit of Mexico, the real interest rate in 1997 was about 6%. 25 If the consumption is same for all three children, that = 1.05 implies that a child consumes 35% of parents consumption. Considering that parents are two adults, the consumption of one child in three children household is equivalent to 70% of an adults consumption.
21
Human Capital and Schooling Table 6: Years of Schooling by Age: Data and Simulation Comparison
Years of Schooling Without PROGRESA With PROGRESA Age Data Simulation Data Simulation 7 1.12 0.95 1.35 0.89 8 1.75 1.78 1.92 1.81 9 2.55 2.52 2.64 2.74 10 3.32 3.21 3.37 3.58 11 4.10 3.86 4.25 4.37 12 4.81 4.47 5.03 5.12 13 5.41 5.06 5.84 5.83 14 5.95 5.63 6.42 6.53 15 6.05 6.16 6.80 7.11 16
21
6.10 6.45 7.12 7.49
Table 6 shows the average years of schooling for each age for the PROGRESA data and simulation, comparing data for children without and with the subsidy program. The subsidy increases the average years of schooling in each age. The increase appears to be especially greater for the older children between the ages of fourteen and sixteen. The results from the simulation show a model prediction of years of schooling with and without the PROGRESA subsidy, and predicts the similar eect of the subsidy on years of schooling as observed in the data.
Time Investment in Human Capital Accumulation 1 0.9 With Subsidy 0.8 0.7 0.6
Time
Human Capital Accumulation 1200
1000
800
With Subsidy
Human Capital
0.5 Without Subsidy 0.4 0.3 0.2 0.1 0 6
600
WIthout Subsidy 400
200
10
12
14
Childs Age
16
18
20
22
0 6
10
12
14 Childs Age
16
18
20
22
Figure 2. The Effects of Subsidy:

Time Investment and Human Capital Accumulation
Figure 2 presents the outcomes of time investment and human capital accumulation paths of the ages of children, and compares these outcomes with and without the subsidy.26 As shown in the gure, the increase in time investment is signicant while the subsidy is provided until the
For the comparison of these outcomes in the case without credit constraint and with parents pure altruism, see Appendix B. It discusses the source of ineciency that results in under-investment and thus provides the rationale for governmental intervention. Moreover, the paths of assets and human capital accumulation, and time investment in human capital production are presented.
26
22
age of 16, after which the reduction in time investment is steep. The overall increase in human capital due to the subsidy and thus the increase in labor earnings is around 19%. The introduction of subsidy increases schooling and human capital accumulation. In terms of evaluating what the increase in human capital implies and whether the subsidy rate is optimal, I will consider two ways to quantify the eects. The rst is in terms of the cost and benets of the subsidy program and the other is by the comparison to the human capital achieved in an ideal economy without either borrowing constraints or without impure altruism. IVb. Benets and Costs of the Subsidy Program Based on the simulations, I calculate the benets and costs of PROGRESA. The benets of increasing human capital accumulation as a result of subsidy are from two sources. One is the present discounted value of the increase in earnings contributed to the household due to the introduction of the subsidy. The second is the present discounted value of the increase in the lifetime earnings of the child.27 The costs of the subsidy is simply the present discounted value of the subsidy amounts provided to households.28 The simulations show that with a subsidy rate of 20%, the benets of the program exceeds the cost by 60%.29 The benet-cost ratio is higher for children from larger families, implying that the subsidy is more eective for those children. IVc. Comparison to a No Credit Constraint and Pure Altruism Case In addition, I examine whether PROGRESA can raise human capital to the level that could have been obtained in an economy without credit constraint and with pure altruism.30 On average, the subsidy increases human capital accumulation, although the extent to which the level of human capital becomes closer to the outcome of the no constraint case varies by the ability and family size of the child. The lower-ability children and children from smaller families achieve even greater human capital by the introduction of the subsidy than what they
There can be indirect benets of subsidizing and increasing education. For example, Barnett (1992) calculate benets of early education using ve types of benets including the value of child care and reduction in the costs of crime. However, I consider main benets of education which increases household income and lifetime earnings. 28 There must be administrative costs related to implementing this program. However, for this calculation, subsidies provided to households are only included to the costs of the program. 29 The lifetime earnings are calculated assuming that the individuals make the same level of labor earnings from the age of 23 onwards until they retire at age 65, with the real interest rate xed at 6%. 30 Note that this idealistic environment with no credit constraint and pure altruism does not mean that there is no under-investment at all. Parents are still making decision on behalf of children without full consideration of childrens lifetime utility. Although parents utility from altruistic motive captures parents concern about childrens lifetime utility, it is not necessarily same with childrens own lifetime utility.
27
23
could have achieved without constraint, while the human capital accumulation of higher-ability children and children from larger families fall short. The overall level of human capital is short of the no constraint level by 8%. The eect of subsidy is dierent across households and individuals. The eect would be greatest for those households which are borrowing constrained without any subsidy and become not constrained with subsidy, since the negative eect of borrowing constraint on education is huge.31 Considering this, the eects on marginal households would be greater and the subsidy has a greater impact on children from larger family on average, since the larger families are more likely to be on the margin than the smaller families. In summary, through this calibration, my model replicates the observed schooling decisions and the eects of the program. The results show that the subsidy increases overall years of schooling and, thus, human capital accumulation. The benet of the subsidy, by increasing education, exceeds the cost of the subsidy when the lifetime eect of increase in earnings are taken into account. The magnitudes of the eects are not uniform: the magnitude depends on various factors including to what extent households are credit constrained. The model implies that the eect of subsidy is greater for children from larger families.
V. An Empirical Test
In this section, I test whether the eect of PROGRESA is greater for larger families. In addition, I examine gender dierences in schooling. First, I test whether the gender dierence in educational attainment is due to parental preferences. Second, I investigate the eects of subsidy on both genders. Va. Family Size and Subsidy Eects If the credit markets were perfect, the educational attainment of children would be the same across households regardless of family size. However, with borrowing constraints, children in larger families are not able to attend school for as long a period of time as children in smaller families. Increasing the number of children in the household is costly, which implies that borrowing constraints are more severe in these families. Thus educational attainment is lower for children from larger families, other things equal. However, when the subsidies are introduced, their eects are expected to be greater for larger families. In other words, for a child in a smaller family who would have attended school regardless of the subsidy program, since those households are not greatly borrowing constrained, the
31
Recall the eect of borrowing constraint on time investment and human capital accumulation from Appendix
B.
24
subsidy does not greatly aect the schooling decision. However, a child in larger family may now be able to attend school due to the introduction of the subsidy, otherwise the child would not have been able to attend school. In that sense, the eects of subsidy are expected to be greater for children from larger families. From the simulation, it is also shown that the eect of the subsidy is greater for these children. To test this hypothesis, the following equation of school attendance is specied and estimated with the experimental data. Let sit indicate school attendance at time t for individual i. The event of attending school (st = 1), is determined by a latent variable s t , which can be explained by individual, family, and locality characteristics. In other words, s it = xit + i + sit = { 1 0
it
(15)
if s it > 0 , i = 1, ..., N , t = 1, ..., T if s it 0
where xit denotes the characteristics of individual i, at time t, it is unobservable individual heterogeneity and it is white noise. Since this individual heterogeneity (i ) is unobservable, it is considered as a individual random variable. Thus, the random eects logit regression is estimated.32 Because the data set is a panel, following the same individuals over time, I estimate the equation controlling for the unobservable characteristics (i ). The individual characteristics include age, gender and the indicator of the eldest child of each gender. Family characteristics include a measurement of parents education level and the age of the youngest child. As a variable showing the family size, the number of adults and dummy variables for the number of children are included. The characteristics of the locality include the presence of a primary school and a secondary school within the locality, and the local wage rate for child labor at each age. To capture the eects of the program, I include the indicator of program locality, eligible households, and the indicator of the time when the program began. Finally, the dierential eects of the program on households with dierent numbers of children are reected in the variable of the interaction between indicators of program locality, eligible households and after the program onset. The summary statistics of the variables which are used in this analysis and the results from the random eects logistic regression are presented in Tables C1 through C3 in the Appendix. The
The conditional distribution of this variable conditioning on other observable variables are assumed to 2 follow normal distribution: G(i |xit ) N (0, ). Then the conditional probability of schooling specied as ew P r(sit = 1|xit , i ) = F ( xit + i ) where F satises F (w) = 1+ . Then the log likelihood function is ew log L =
N i=1 32
log
F ( xit + i )sit {1 F ( xit + i )}1sit dG(|x). According to Heckmans the Monte Carlo
experiments, the xed eect estimate for the parameters is not consistent when T is nite. (Heckman(1981))
t=1
Human Capital and Schooling Table 7: Random Eects Logit Regression-Family Size. (1)
Variables N=1 (dropped) N=2 N=3 N=4 N=5 N6 Treat*After Treat*After*N=1 Treat*After*N=3 Treat*After*N=4 Treat*After*N=5 Treat*After*N6 0.243 (0.127) (0.129) (0.133) (0.137) (0.138) (0.070) (0.166) (0.124) (0.121) (0.123) (0.114) Coecient S.E. Variables Poor*N=1 Poor*N=2 Poor*N=3 Poor*N=4 Poor*N=5 Poor*N6 Treat*After*Poor Treat*After*Poor*N=2 Treat*After*Poor*N=3 Treat*After*Poor*N=4 Treat*After*Poor*N=5 Treat*After*Poor*N6
25
(2)
Coecient -1.056 -0.785 -0.903 -0.757 -0.761 -0.984 0.574 0.091 0.408 0.246 0.269 0.451 S.E. (0.217) (0.186) (0.184) (0.173) (0.176) (0.184) (0.150) (0.197) (0.188) (0.183) (0.184) (0.178)
-0.029
0.071 0.005 -0.312 0.024 -0.141 0.482 0.309 0.320 0.547
*, **, *** signicant at 10%, 5% and 1% condence levels.
results are consistent with intuition: School attendance decreases with the age of a child. The higher the household heads education, the more likely the child is to attend school; The eldest and female child is disadvantaged in schooling; The more adults in the household, the less school attendance for the child; The locality characteristics also have a great eect on schooling. The localities where there are primary and secondary schools and localities with lower local wage rates for child labor, have higher school enrollment. The eects of the subsidy on families of dierent sizes are presented in Table 7. The rst specication analyzes the eect of PROGRESA on the localities of the program after it starts. The results show that the child from families with six children or more has signicantly lower school enrollment compared to the child from one child family. The eects of subsidy program on the school enrollment of children in program localities, presented in the bottom panel of the table, are signicantly greater for children from larger families. Since only eligible (poor) households receive cash transfers from the PROGRESA program, even though the entire program locality benets from indirect supports of the program, the second specication captures the programs eect only on eligible (poor) households. Compared to non-poor households with each number of children, poor households show signicantly lower school attendance of children. The bottom panel shows the eects of subsidy on the school enrollment of children in eligible
26
(poor) households in program localities after the program starts. There is an overall signicant increase in school enrollment for these children. The eects are shown to be larger for children from 3 child families and 6 or more child families, compared to children from one child families. The results from both specications consistently show that the eects vary with the size of the family. Although the school attendance of children from larger families is signicantly lower than that of smaller families, the eects of subsidies are greater for families with a larger number of children. This suggests that the PROGRESA subsidy mitigates the negative eect of the number of children in the household and thus the credit constraints. Vb. Gender and Subsidy Eects In this section, I examine whether parents have unequal concern by gender, and whether this causes dierent educational outcomes between the genders. According to my model, dierences in educational attainment of children between genders can be due to two factors: rental rate for human capital and parents altruism factor. The fact that men and women with the same level of education make dierent labor earnings (Recall Table 4.) suggests that there is dierence in the rental rate of human capital by gender. However, there is little evidence that parents have unequal concern for children of dierent gender. The expenditure on clothes and shoes of female and male children, which is often used as measure that reects parents altruism toward the children of each gender, shows that the households spend about the same proportion of the entire expenditure for children of each gender; 24.8% for male children and 23.9% for female children on average.33 Therefore, whether parents altruism diers towards children of each gender is not obvious. The hypothesis to be tested is that the school enrollment of female children from households with only female children should be dierent from that of households with male and female children, if what makes a dierence in school attendance of children across gender is parents preference. I again estimate random eects logistic regression for school enrollment of female children. The empirical specication is similar to equation (15). The indicator of female-children-only households interacted with poverty status is included to reect dierences that might be due to the parents altruism. The following table shows the results from the equation.34 The results show that there is no signicant dierences in school enrollment of female children in households with only female children compared to children in households with female and
33 34
Data source: PROGRESA 1998 household survey See Table C4 in the Appendix for the complete results.
Human Capital and Schooling Table 8: Random Eects Logit Regression-Gender (1).
Variables Female Only Female Only*Poor Treat*After*Poor Treat*After*Poor*Female Only Coecient 0.003 -0.264 0.953 -0.020 S.E. (0.183) (0.203) (0179) (0.107)
27
male children.35 The outcome of female children in poor households with only female children is not dierent from that of female children in poor households with female and male children. In terms of the subsidy eect, there is no signicantly dierent eect on female children in both types of households. In addition, the eects of the subsidy on children of each gender is investigated. Since the subsidy rate for older female children is higher, while the rate is the same for both genders of younger children, the eects of subsidy on school attendance of older female children should be larger than the eects for older male children, while the eects on younger children are expected not to dier by gender.36 Table 9: Random Eects Logit Regression-Gender (2).
Variables Female Older Female Treat*After*Poor Treat*After*Poor*Female Treat*After*Poor*Older*Female Coecient -0.020 -0.405 S.E. (0.817) (0.198)
1.696
-0.186 0.601
(0.159)
(0.131) (0.184)
As presented in Table 9, the school enrollment is much lower for older female children.37 The eects of the subsidy program is consistently found to be positive and signicant. The eect of the subsidy on school enrollment of female children is not signicantly dierent from that of
Note that this regression estimates only female childrens school enrollment. The number of observations used for this regression is 50,368 which is about half of the total observation in data. The proportion of female children in households with only female children is 38%, and the other 62% of female children are in households with female and male chilren. 36 Older children refer to those who are over 12 years old and corresponds to the secondary school level. 37 See Table C5 in the Appendix for the complete results.
35
28
male children. However, the subsidy signicantly increases the school attendance of older female children.
VI. Policy Experiments

Having investigated the households investment in childrens human capital and the eect of the educational subsidy program using PROGRESA, policy implications are now considered. Specically, simulations with alternative subsidy schedules are examined to consider alternative policies that might be more eective. Va. Subsidy Varying by Ability In the previous calibration of the benchmark model, the subsidy rate is xed at 20% for all children. The reason why the policy makers should implement a higher subsidy rate for higherability children is that higher-ability children are more disadvantaged by credit constraints.38 In this exercise, for the lower-half of children by ability distribution is subsidized at the rate of 15% and the other half is subsidized at the rate of 25%. The cost and benets of this new subsidy schedule is compared to the benchmark case. A higher subsidy rate for higher-ability children increases cost of subsidy by 70%, while the benet of the subsidy increases by 87%. Thus, the ratio of benet to cost of this subsidy slightly increases, meaning that ability-based scholarship is more eective in terms of benet and cost aspect. Since the government is not able to observe individual childs ability, the merit-based subsidy such as larger scholarship for children with better test scores might be implementable.39 Vb. Subsidy Varying by Family Size A higher subsidy rate for larger families is more eective than a at subsidy rules, because the eects of subsidies are greater for children in larger families. Considering that children from larger families are more disadvantaged by borrowing constraint, the greater subsidy for them seems justiable. Although I nd that the subsidy rate varying by family size is more eective, it may not be practically implementable. It is currently assumed that the family size is exogenous. However,
The reduction in education due to a borrowing constraint is greater for higher-ability children and children from larger families. In that sense, they are more disadvantaged by credit constraint. See Appendix B again for the eect of borrowing constraints. 39 The data of childrens school performance such as test scores are not available at the period of analysis. Examining the eects of the PROGRESA subsidy on school performance across children with dierent test scores can be a subject for further research.
38
29
considering that a family size and fertility are also decisions that the household makes, greater subsidies for larger families might cause people to have additional children which would result in more credit constraint.40
VII. Conclusion
In this study, I quantitatively assess the eect of PROGRESA on the education of the children. I develop a dynamic model of household behavior to determine how parents determine childrens schooling. My model shows that parents who rely on childrens earnings for household consumption, and either face the credit constraints or have impure altruism toward children, under-invest in childrens human capital. The educational subsidy contingent on school attendance reduces the problem of under-investment. The educational subsidy program aims to achieve the goal of increasing human capital accumulation in an eective and ecient way. I evaluate the program in two ways. First, I analyze the benets and costs of the subsidy. Second, I investigate the increase in human capital induced by a subsidy, and whether this increase is large enough to achieve human capital that could have been achieved without credit constraints and with purely altruistic preferences. I nd that PROGRESA increases average years of schooling by one year and human capital accumulation by 19%. Higher-ability children and children from larger families are disadvantaged and obtain less human capital than compared to an economy without borrowing constraints and with pure altruism. Although the subsidy increases the human capital, it falls short of the unconstrained level. And this shortage is even greater for higher-ability children and children from larger families. From a benet-cost perspective, the benet of PROGRESA exceeds the cost at the current subsidy rate. The model implies that the subsidy has greater a eect on children from larger families. I test whether the PROGRESA data are consistent with this implication of my model. I nd the eect of subsidy on school enrollment is greater for the children from larger families. The model also suggests that parents impure altruism reduces childrens schooling when a borrowing constraint exists. I reject the hypothesis that the dierence in schooling of children by gender is due to the dierence in parental altruism toward them. The eects of the subsidy are not signicantly dierent by gender when the children is in primary school. Due to the higher subsidy rate for older female children, the eect is greater for older female than older male children.
For this reason, PROGRESA impose maximum amount of subsidy to the households, which does not exceeds three times of the per child amount of subsidy
40
30
My model shows that parents decision on schooling on behalf of their children is not optimal because it is dierent from what children would have make if they made on their own. The borrowing constraint and impure altruism reduces education even further. The government, therefore, has incentive to intervene to remedy the under-investment. I examine policy experiments that provide varying subsidy rates according to ability and family size. I nd that a larger subsidy for higher-ability children and children from larger families are more eective in both increasing human capital.
31
References
Adato, M., B. Briere, D. Mindek and A. Quisumbing (2000). The Impact of Progresa on Womens Status and Intrahousehold Relations, International Food Policy Research Institute, Washington, D.C. Aiyagari, S., J, Greenwood, and A. Seshadri (2002). Ecient Investment in Children, Journal of Economic Theory, 102(2), 290-321. Altonji, J., and T. Dunn (1996). The Eects of Family characteristics on the Return to Education, Review of Economics and Statistics, 78(4), 692-704. Attanasio, O., C. Meghir and A. Santiago (2001). Education Choices in Mexico: Using a Structural Model and a Randomized Experiment to Evaluate Progresa, Inter-American Development Bank, Washington, D.C. Barnett, W. (1992).Benets of Compensatory Preschool Education, Journal Human Resources, 27(2), 279-312. Becker, G., and N. Tomes (1986).Human Capital and the Rise and Fall of Families, Journal of Labor Economics, 3(4), S1-S39. Behrman, J., R. Pollak, and P. Taubman (1982). Parental Preferences and Provision for Progeny, Journal of Political Economy, 90(1), 52-73. Behrman, J., R. Pollak, and P. Taubman (1986). Do Parents Favor Boys?, International Economic Review, 27(1), 33-54. Behrman, J., P. Sengupta, and P. Todd (2001). Progressing through PROGRESA: An Impact Assessment of a School Subsidy Experiment, April. University of Pennsylvania and the International Food Policy Research Institute, Washington, D.C. Behrman, J. and P. Todd (1999). Randomness in the Experimental Samples of PROGRESA (Education, Health, and Nutrition Program), International Food Policy Research Institute, Washington, D.C. Ben-Porath, Y. (1967). The Production Function of Human Capital and the Life Cycle of Earnings, Journal of Political Economy, 75(4), part 1, 352-365. Cameron, S. and C. Taber (2000). Borrowing Cnstraints and the Returns to Schooling, NBER Working Paper # 7761. Card, D. (1999). The Causal Eect of Education on Earnings in O. Ashenfelter, and D. Card, eds., Handbook of Labor Economics, Vol 3A. Amsterdam: Elsevier Science, North-Holland, 1801-1863.
32
Deaton, A. and J. Muellbauer (1986). On Measuring Child Costs: With Application to Poor Countries, Journal of Political Economy, 94(4), part 1, 720-744. Gould, B. and H. Villarreal (2002). Adult Equivalence Scales and Food Expenditures: an Application to Mexican Beef and Pork Purchases, Applied Economics 34, 1075-1088. Griliches, Z. (1977). Estimating the Returns to Schooling: Some Econometric Problems, Econometrica 45(1), 1-22. Heckman, J. (1976). A Life-Cycle Model of Earnings, Learning, and Consumption, Journal of Political Economy 84(4), S11-S44. Heckman, J. (1979). Sample Selection Bias as a Specication Error, Econometrica 47(1), 153-161. Heckman, J. (1981). The Incidental Parameters Problem and the Problem of Initial Conditions in Estimating a Discrete Time-Discrete Data Stochastic Process in Structural Analysis of Discrete Data with Econometric Applications, edited by C.F. Manski and D. McFadden, pp. 179-195. Cambridge, MA: MIT Press. Keane, M. and K. Wolpin (1997). The Career Decisions of Young Men, Journal of Political Economy 105(3), 473-522. Mincer, J. (1974). Schooling, Experience, and Earnings, New York: NBER. Pollak, R. (2002). Gary Beckers Contribution to Family and Household Economics, NBER Working Paper # 9232. Reinhart, C. and E. Talvi (1998). Capital Flows and Saving in Latin America and Asia: A Reinterpretation, Journal of Development Economics, 57(1), 45-66 Schultz, P. (2000). School Subsidies for the Poor: Evaluating the Mexican Strategy for Reducing Poverty, International Food Policy Research Institute, Washington, D.C. Schultz, P. (2001). School Subsidies for the Poor: Evaluating the Mexican Progresa Poverty Program, Economic Growth Center Discussion Paper, # 834. Skouas, E., B. Davis and J. Behrman (1999). An Evaluation of the Selection of Beneciary Households in the Education, Health, and Nutrition Program (PROGRESA) of Mexico, International Food Policy Research Institute, Washington, D.C. Todd, P. and K. Wolpin (2003). Using a Social Experiment to Validate a Dynamic Behavioral Model of Child Schooling and Fertility: Assessing the Impact of a School Subsidy Program in Mexico, PIER Working Papers, University of Pennsylvania. Wills, R. (1986). Wage Determinants: A Survey and Reinterpretation of Human Capital Earnings Functions in O. Ashenfelter and R. Layard, eds. Handbook of Labor Economics, Vol. 1, Chapter 10. New York: North Holland.
33
Appendix
A. Solution for Old Age For old age, the following assumptions are made: 1) parents have no bequest motive nor are they able to leave their ospring a debt. 2) There is no uncertainty about their retirement, Q, and death, D. By imposing these assumptions, the borrowing constraint is no longer binding as long as the asset at t = T is positive. Then the continuation value of parents b(AT ) is equivalent to
D
b(AT ) = max
Ct t=T D
tT u(Ct )
Q t=T
s.t.
t=T
Ct = (1 + r)tT
Et + (1 + r)AT . (1 + r)tT
(A1)
) = (1 + r )u (C ), and u (C ) = C , the following equation By the Euler equation, u (Ct t t t+1 holds for k = 0, ..., D T k/ CT CT . +k = {(1 + r )}
is derived as a function of A Using this equation which holds for optimal consumption, CT T from the budget constraint (equation (A1)), so that DT CT k=0
{(1 + r)}k/ = (1 + r)k
Q t=T
Et + (1 + r)AT (1 + r)tT
equivalently,
Q CT Et (1+r)tT DT k=0
t= T
+ (1 + r)AT . (A2)
{(1+r)}k/ (1+r)k
Meanwhile, the Bellman equation for the old age problem is written as b(AT ) = max u(CT ) + b(AT +1 )
CT D
s.t.
t=T
Ct = (1 + r)tT
Q t=T
Et + (1 + r)AT . (1 + r)tT
(A3)
Human Capital and Schooling The Envelope condition gives a following equation.
b1 (AT ) = (1 + r)u (CT ).
34
with equation (A2), the rst derivative of the value function of old age Then, by replacing CT with respect to asset level, b1 (AT ), is found.
B. Outcomes under a Perfect Capital Market and with Pure Altruism This section presents the outcome of household assets and childrens human capital accumulation, and time investment paths assuming a perfect capital market and parents pure altruism. By projecting the outcomes of households decisions without credit constraint and with parents pure altruistic preferences, I can get some idea how the factors of ineciency change outcomes. Figure B1. Assets and Human Capital Accumulation, and Time Investment.
Asset Accumulation: r=1.06, 1=0.73, =1, =0.96, N=3 2000
Human Capital Accumulation: r=1.06, 1=0.73, =1, =0.96, N=3 6000
1500
5000
1000
4000
500
Human Capital
Assets
low ability 0
3000
high ability
2000
500 high ability
low ability 1000
1000
1500 20
25
30
35
40
45
50
55
60
65
70
75
10
12
Parents Age
14 16 Childs Age
18
20
22
Time Investment for Human Capital Accumulation: r=1.06, 1=0.73, =1, =0.96, N=3 1
0.9
0.8 high ability 0.7
0.6
Time
0.5
0.4
0.3 low ability 0.2
0.1
10
12
14 Childs Age
16
18
20
22
35
Figure B1 presents the pattern of assets of household, and human capital and time investment human capital accumulation of children. It is evident that, during early parenthood, parents have low assets and need more resources to support both themselves and their children. As time gets closer to the end of childrens childhood, parents let children devote almost all of their time to working and they take earnings from children before they leave the household. Since the amount of earnings that parents take from the child is greater when the child has higherability, the consumption smoothing behaviors let parents of higher-ability child have much more borrowing than parents of lower-ability child. The asset accumulation for households with a higher-ability child is steeper than it is for other households. By the time the parents begin their old age and a child leaves its natal household, parents make a transfer only to low-ability children to compensate for their low earnings. So the assets for these households with low-ability children decrease a little bit at the end of parents young adulthood. Since the children become independent and leave the household, parents no longer support the childrens consumption. Thus the asset accumulation is slower than in the previous periods. Parents accumulate assets until they retire at age 65 and afterwards they live on what they have accumulated. As shown in human capital accumulation and time investment paths, as childrens human capital grows, parents reduce time investment in human capital rapidly so that the household can receive earnings from the accumulated human capital stock of the child. Since higher-ability children accumulates human capital faster and thus the potential earnings are larger, parents let them stay in the school longer period of time. As predicted in the model part, time investment in human capital accumulation is monotonic to the ability of the child without borrowing constraints. Without borrowing constraints, family size does not aect the paths of human capital accumulation and time investment in children. Now let the borrowing constraint be imposed. The time investment in human capital accumulation of a high-ability child according to the number of children in the household are shown in the Figure B2. The left gure is the outcome of a child from an one-child household and the right one is that of a child from a ve-child household. There is a huge negative eect of borrowing constraint on time investment in human capital accumulation. The negative eect is especially greater for higher-ability child and for children from larger families because the households with higher-ability child and with more children are more constrained by an imperfect capital market.41
Note that all children in the household are assumed to be identical in this example. Thus it provides an extreme illustration of the negative eect on larger family.
41
Human Capital and Schooling Figure B2. The Effects of Borrowing Constraint-Family Size.
Time Investment in Human Capital Accumulation: The Effects of a Borrowing Constraint, N=1 1
36
Time Investment in Human Capital Accumulation: The Effects of a Borrowing Constraint, N=5
0.9 Without Constraint 0.8
0.9
0.8 Without Constraint 0.7
0.7 With Constraint 0.6
0.6
Time
Time
0.5
0.5
0.4
0.4 With Constraint
0.3
0.3
0.2
0.2
0.1
0.1
10
12
14 Childs Age
16
18
20
22
10
12
14 Childs Age
16
18
20
22
Now let parents impure altruism be introduced. Without a borrowing constraint, parents impure altruism does not make dierence in human capital accumulation and only reduces the amount they transfer to children. When combined with a borrowing constraint, impure altruism not only reduces the amount of transfer to children, but also reduces childrens education, compared to the outcomes without constraint. However, the eect of the altruism factor on human capital accumulation is not huge. For example, when the altruism factor is changed from = 1 to = 0, the human capital accumulation for a high-ability child in a ve-child household is reduced by at most 4%, which is equivalent to 63 pesos of monthly earnings. The eects of borrowing constraints combined with impure altruism of parents results in parents under-investing in their childrens human capital. This ineciency and resulting underinvestment provides a good reason for the government to intervene to encourage schooling.
Human Capital and Schooling Table C1. Summary Statistics.

Individual Characteristics Age Gender (Female=1) Eldest N=1 N=2 N=3 N=4 N=5 N6 Locality Characteristics Local Wage Rate 2.96 0.99 0.40 0.61 (4.04) (0.11) (0.49) (0.49) Primary School (Yes=1) Secondary School (Yes=1) Program Locality (Yes=1) Total Number of Observation (Yes=1) Number of Children (N) 0.04 0.11 0.17 0.21 0.18 0.29 (0.21) (0.31) (0.38) (0.40) (0.39) (0.45) Mean 11.09 0.49 0.59 S.D. (2.71) (0.50) (0.49) Family Characteristics Number of Adults Age of the Youngest Family Monthly Earnings Household Heads Education Never 1-3 years 4-5 years Primary Secondary Tertiary and above Program Related Variables Eligible Households (Poor=1) After (Post-program) 0.87 0.75 (0.34) (0.43) 0.27 0.42 0.11 0.16 0.03 0.01 (0.34) (0.49) (0.32) (0.37) (0.17) (0.10) Mean 3.18 4.10 1,327 S.D. (1.45) (4.13) (1,776)
37
102,744
*Eldest is an indicator of being eldest among siblings of each gender. **Average local monthly earnings of children of each age and gender
38
Table C2. Results from Random Effects Logistic Regression-Family Size (1).
Variables Age Gender Eldest (Female=1) (Yes=1) Coecient -0.493 S.E. (0.0125) (0.0478) (0.0458) Household Heads Education Never (dropped) 0.243 (0.127) (0.129) (0.133) (0.137) (0.138) (0.007) (0.132) (0.039) (0.070) (0.070) (0.166) (0.124) (0.121) (0.123) (0.114) 1-3 years 4-5 years Primary Secondary Tertiary and above Program Related -0.169 0.395 0.120 0.024 0.024 -0.141 0.482 0.309 0.320 0.547 Eligible (Poor=1) After (Post-program=1) -0.165 (0.072) (0.052) 0.623 0.917 1.319 1.621 2.132 (0.057) (0.084) (0.080) (0.170) (0.279) Constant Variables Number of Adults Coecient -0.112 9.622 S.E. (0.015) (0.247)
-0.474
-0.265
Number of Children (N) N=1 (dropped) N=2 N=3 N=4 N=5 N6 Locality Characteristics Local Wage Rate (Yes=1) Primary School
-0.029
0.071 0.005 -0.312
-0.022
Secondary School (Yes=1) Program Locality (Treat=1) Program Eects Treat*After Treat*After*N=1 Treat*After*N=3 Treat*After*N=4 Treat*After*N=5 Treat*After*N6
Log likelihood = -30611.127, Number of observation=102,744 *, **, *** signicant at 10%, 5% and 1% condence level each
39
Table C3. Results from Random Effects Logistic Regression-Family Size (2).
Variables Age Gender Eldest (Female=1) (Yes=1) Coecient -0.555 S.E. (0.0103) (0.0473) (0.0458) Household Heads Education Never 0.392 0.259 0.286 0.122 -0.153 Rate (Yes=1) (Yes=1) -0.113 0.407 0.121 (0.181) (0.197) (0.214) (0.239) (0.263) (0.006) (0.133) (0.039) (0.203) (0.184) (0.150) (0.216) (0.254) (0.197) (0.187) (0.183) (0.184) (0.177) 1-3 years 4-5 years Primary Secondary Tertiary and above Program Related Variables Eligible Households (Poor=1) After (Post-program) Poor*N=1 Poor*N=2 Poor*N=3 Poor*N=4 Poor*N=5 Poor*N6 -1.056 -0.785 -0.903 -0.757 -0.761 -0.984 (0.217) (0.186) (0.184) (0.173) (0.176) (0.184)
Variables Number of Adults Constant
Coecient -0.133 10.343
S.E. (0.015) (0.297)
-0.441
-0.265
Number of Children (N) N=1 (dropped) N=2 N=3 N=4 N=5 N6 Locality Characteristics Local Wage Primary School
0.595 0.897 1.287 1.562 1.971 -0.813
(0.056) (0.084) (0.080) (0.170) (0.282) (0.254) (0.142)
Secondary School Program Eects Treat*After After*Poor Treat*Poor
-0.489
Program Locality (Treat=1)
-0.026
0.125 0.559 0.076 0.154 0.090 0.408 0.247 0.269 0.447
Treat*After*Poor*N=1 Treat*After*Poor*N=2 Treat*After*Poor*N=3 Treat*After*Poor*N=4 Treat*After*Poor*N=5 Treat*After*Poor*N6
Human Capital and Schooling Table C4. Results from Random Effects Logistic Regression-Gender (1).
Variables Age Number of Eldest Children (Yes=1) Rate (Yes=1)
40
Coecient -0.614 -0.048 -0.333 -0.1022 0.545 0.227 -0.601
S.E. (0.017) (0.020) (0.065)
Variables Number of Adults Age of the Youngest Child Household Heads Education
Coecient -0.112 -0.003
S.E. (0.015) (0.009)
Locality Characteristics Local Wage (0.008) (0.189) (0.055) (0.212) (0.052) (0.070) (0.177) (0.179) (0.184) (0.204) (0.107) Primary School (Yes=1) Secondary School Program Related Eligible Households (Poor=1) After (Post-program) Program Locality (Yes=1) Treat*After Treat*After*Poor Gender Related Female Only (Yes=1) Female Only*Poor Female Only*Treat*After*Poor 0.032 -0.285 -0.067
Never 1-3 years 4-5 years Primary Secondary Tertiary and above 0.518 1.029 1.153 1.754 1.644 (0.081) (0.121) (0.110) (0.245) (0.380)
-0.022
0.024 -0.281 0.938
Human Capital and Schooling Table C5. Results from Random Effects Logistic Regression-Gender (2).
Variables Age Eldest (Yes=1) (N) Number of Children Gender(Female=1) Older(Secondary Level=1) Older*Female Eligible (Poor=1) After Program Locality (Treat=1) Treat*After Treat*Poor Treat*Poor*After Treat*Older*Female Poor*Older*Female After*Older*Female Treat*Poor*After*Female Treat*Poor*After*Older Treat*Poor*After*Older*Female
41
Coecient -0.580 -0.338 -0.055 -0.020 -0.037 -0.406 -0.350 0.064 0.351 -0.420 -0.437 1.696 0.244 -0.080 -0.536 -0.186 -1.030 0.601
S.E (0.014) (0.045) (0.014) (0.082) (0.082) (0.198) (0.124) (0.061) (0.177) (0.131) (0.179) (0.159) (0.129) (0.148) (0.094) (0.131) (0.109) (0.184)
Variables Number of Adults Constant Household Heads Education Never(dropped) 1-3 years 4-5 years Primary Secondary Tertiary and above Locality Characteristics Local Wage Rate Primary School (Yes=1) Secondary School (Yes=1)
Coecient -0.131 10.185
S.E (0.015) (0.250)
0.598 0.940 1.338 1.661 2.025
(0.056) (0.084) (0.080) (0.171) (0.289)
-0.133 0.377 0.142
(0.005) (0.133) (0.039)

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Investment in Childrens Human Capital: Implications of PROGRESA

Yoonyoung Cho November 2004 University of Wisconsin, Madison

Human Capital and Schooling

Human Capital and Schooling

Human Capital and Schooling

II. Data and Descriptive Analysis

Human Capital and Schooling

Source: Schultz (2000, Table 1) All values in 1998 pesos.

Source: PROGRESA, 1997 Census data. Earnings are in 1998 pesos.

Table 3: School Enrollment Rates (%).

Human Capital and Schooling

Source: PROGRESA, 1997 Census. Number of observations: men=33,198 and women=33,279

Human Capital and Schooling

III. Analytical Framework

Human Capital and Schooling

Ekt + (1 + r)At , Ekt + (1 + r)At ,

parents income, Et , aggregate childrens income,

Ekt , and savings from the previous period,

Human Capital and Schooling

Ckt = (N )Ct where (N ) is an equivalence scale depending on the number of children in

{(1 Ikt )Rt Hkt + Ikt Rt Hkt } + (1 + r)At (at t = 0, ..., T 2)

{(1 Ikt )Rt Hkt + Ikt Rt Hkt } + (1 + r)At (at t = T 1).

Human Capital and Schooling

{(1IkT 1 )RT 1 HkT 1 +IkT 1 RT 1 HkT 1 }+(1+r)AT 1 .

(4) (5) (6)

u (CT 1 ) = W1 (RT HkT + Fk ) 1 + (N ) u (CT 1 ) = b1 (AT ). 1 + (N )

Rearrange equation (4), replacing HkT :

from the production function of human capital. (4 )

1 u (CT 1 ) RT 1 (1 ) HkT (1 )HkT 1 1 ( ) 1 = RT W1 (RT HkT + Fk ). 1 + (N ) 0 1 0

u(Ct ) + vt+1 (At+1 , Ht+1 , F )

Human Capital and Schooling

14 {(1 Ikt )Rt Hkt + Ikt Rt Hkt } + (1 + r)At , t = 0, ..., T 2.

u (Ct ) = vA,t+1 (At+1 , Ht+1 , F ). 1 + (N )

The Envelope conditions are vHk ,t (At , Ht , F ) = vA,t (At , Ht , F ) =

tT u(Ct ) with the

+ Fk , where Nk , D , and Q denote the number of children,

Human Capital and Schooling

Figure 1: Determination of Human Capital Stock

When 1 > 0.5, it is shown that

Human Capital and Schooling

Human Capital and Schooling

W1 (RT HkT + Fk )=b1 (AT ),

Human Capital and Schooling

Educational Subsidy Other Parameters

Human Capital and Schooling

6.10 6.45 7.12 7.49

Human Capital Accumulation 1200

0.5 Without Subsidy 0.4 0.3 0.2 0.1 0 6

WIthout Subsidy 400

Figure 2. The Effects of Subsidy:

Human Capital and Schooling

Human Capital and Schooling

Human Capital and Schooling

if s it > 0 , i = 1, ..., N , t = 1, ..., T if s it 0

*, **, *** signicant at 10%, 5% and 1% condence levels.

Human Capital and Schooling

*, **, *** signicant at 10%, 5% and 1% condence levels.

*, **, *** signicant at 10%, 5% and 1% condence levels.

Human Capital and Schooling

VI. Policy Experiments

Human Capital and Schooling

Human Capital and Schooling

Human Capital and Schooling

, , signicant at 10%, 5% and 1% condence levels.

, , signicant at 10%, 5% and 1% condence levels.

, , signicant at 10%, 5% and 1% condence levels.

Secondary School Program Eects TreatAfter AfterPoor Treat*Poor

TreatAfterPoorN=1 TreatAfterPoorN=2 TreatAfterPoorN=3 TreatAfterPoorN=4 TreatAfterPoorN=5 TreatAfterPoorN6