Past estimates of the effect of family income on child development have often been plagued by endogeneity and measurement error. In this paper, we use two simulated instrumental variables strategies to estimate the causal effect of income on children's math and reading achievement. Our identification derives from the large, non-linear changes in the Earned Income Tax Credit (EITC) over the last two decades. The largest of these changes increased family income by as much as 20%, or approximately $2,100. Using a panel of almost 5,000 children matched to their mothers from National Longitudinal Survey of Youth datasets allows us to address problems associated with unobserved heterogeneity, endogenous transitory income shocks, and measurement error in income. Our baseline estimates imply that a $1,000 increase in income raises combined math and reading test scores by 6% of a standard deviation in the short run. The gains are larger for children from disadvantaged families and are robust to a variety of alternative specifications. We find little evidence of long-run income effects, with most of the effects disappearing after one year.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14599.
Length: Date of creation: Dec 2008 Date of revision: Handle: RePEc:nbr:nberwo:14599
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Find related papers by JEL classification: H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs I32 - Health, Education, and Welfare - - Welfare and Poverty - - - Measurement and Analysis of Poverty I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
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