Competition in household human capital investments: Strength, motivations and consequences

In Asian countries, especially China, household investments in children’s human capital have drawn considerable attention. In this paper, we examine the existence and strength of competition in these investments. We use data from a representative survey of middle-school students in China, focus on students with random assignments to classrooms, and construct peer-effect models. We introduce five investments, namely, two out-of-household and three intra-household investments, including money, time, and parenting styles, to check the potential mechanisms behind these peer effects. Our findings are consistent with the framework of competition among households, which comes from parents’ high educational expectations and larger education returns under social inequality. Based on counterfactual analyses and the limited impact of competition on children’s skills, policymakers should boost public expenditures to replace private education investments and improve social equality to reduce competition.