Income shocks and Human capital investment in the presence of credit and insurance market imperfections : Decision-making mechanisms in Ethiopia[Chocs de revenu et éducation des enfants en présence d'imperfections du marché du crédit et de l'assurance : Mécanismes décisionnels en Ethiopie]

Income shocks to poorer households may lead parents to withdraw their children from school and enter the labour market when other risk control instruments are insufficient. These responses to short-term shocks can have longer-term consequences for the development of children's human capital. Using data from a household survey in Ethiopia, we examine the impact of rainfall shocks on medium-term human capital investment decisions. The results suggest that climate shocks significantly reduce investment in human capital. In this context, psychological mechanisms play an important role in the household decision-making process behind children's school drop-out. We argue that exposure to income shocks exacerbates the perception of investment in educational capital as relatively risky, all else being equal. The high prevalence of income shocks (natural experiments) or the perception of this prevalence aggravates households' risk aversion, by accentuating the concavity of their utility function.