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Incomplete Markets and Parental Investments in Children

Author

Listed:
  • Brant Abbott

    (Queen's University)

Abstract
The effect of incomplete markets on parental investments is investigated. Uninsured risk and credit constraints can distort the timing of parental investments, causing them to be delayed relative to what would occur under full-insurance. Age-dependent subsidies, taxes or transfers can all possibly correct this. Analytical results are provided, and a numerical life-cycle model provides quantitative results. Data on ability and parental investment dynamics are used to calibrate the model. A sequence of optimal policy experiments is conducted beginning with a simple reform of the tax and transfer schedule and ending with more complex parent-specific tax parameters and investment subsidies, all of which vary with child age. The final experiment generates substantial improvements in the ability distribution and a consumption equivalent welfare gain that is 2.5 times as large as simply reforming the tax schedule. About 1/4 of this incremental gain results from including child-age dependent policies that alleviate distortions of parental investment timing. (Copyright: Elsevier)

Suggested Citation

  • Brant Abbott, 2022. "Incomplete Markets and Parental Investments in Children," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 104-124, April.
  • Handle: RePEc:red:issued:19-186
    DOI: 10.1016/j.red.2021.02.012
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    Cited by:

    1. João Galindo da Fonseca & Charles Berubé, 2023. "Spouses, Children, And Entrepreneurship," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 1165-1199, August.
    2. Iacopo Morchio, 2022. "Policies for Early Childhood Skills Formation: Accounting for Parental Choices and Noncognitive Skills," Bristol Economics Discussion Papers 22/755, School of Economics, University of Bristol, UK.
    3. Pedro Carneiro & Kjell Salvanes & Emma Tominey, 2024. "Insurance against Income Shocks, Parental Investments, and Child Development," CEPEO Working Paper Series 24-04, UCL Centre for Education Policy and Equalising Opportunities, revised Jun 2024.
    4. Emily G. Moschini, 2023. "Childcare Subsidies and Child Skill Accumulation in One- and Two-Parent Families," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(1), pages 475-516, January.

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    More about this item

    Keywords

    Incomplete markets; Human capital; Skill formation;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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