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Early and Late Human Capital Investments, Borrowing Constraints, and the Family

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  • Lance Lochner

    (University of Western Ontario)

  • Elizabeth Caucutt

    (University of Western Ontario)

Abstract

This paper investigates the importance of family borrowing constraints in determining human capital investments in children at early and late ages. We begin by providing new empirical evidence that suggests binding borrowing constraints among at least some families with young children. Next, we develop an intergenerational model of lifecycle human capital accumulation to study the role of early versus late investments in children. We analytically show that when early and late investments are sufficiently complementary in the production of human capital, binding borrowing constraints during either period reduce both early and late investments. We use data from the Children of the NLSY, NLSY, and CPS to calibrate our dynastic model. Our calibrated steady state suggests that about 40% of young parents and 30% of old parents are borrowing constrained, while older children are unconstrained. We also find strong complementarity between early and late investments, suggesting that policies targeted to one stage of development tend to have similar effects on investment in the other stage. We use this calibrated model to study the effects of education subsidies, loans and transfers offered at different ages on early and late human capital investments and subsequent earnings in the short-run and long-run.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 128.

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Date of creation: 2012
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Handle: RePEc:red:sed012:128

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  1. Melvin Stephens Jr., 2003. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans," NBER Working Papers 9976, National Bureau of Economic Research, Inc.
  2. Elizabeth M. Caucutt & Lance Lochner, 2005. "Borrowing constraints on families with young children," Proceedings, Federal Reserve Bank of Cleveland, pages 39-48.
  3. Meta Brown & John Karl Scholz & Ananth Seshadri, 2009. "A New Test of Borrowing Constraints for Education," NBER Working Papers 14879, National Bureau of Economic Research, Inc.
  4. Lance J. Lochner, 2009. "The Nature of Credit Constraints and Human Capital," 2009 Meeting Papers 745, Society for Economic Dynamics.
  5. Hanushek, Eric A. & Leung, Charles Ka Yui & Yilmaz, Kuzey, 2003. "Redistribution through education and other transfer mechanisms," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1719-1750, November.
  6. Carneiro, Pedro & Heckman, James J., 2002. "The Evidence on Credit Constraints in Post-Secondary Schooling," IZA Discussion Papers 518, Institute for the Study of Labor (IZA).
  7. Flavio Cunha & James Heckman & Susanne Schennach, 2010. "Estimating the technology of cognitive and noncognitive skill formation," CeMMAP working papers CWP09/10, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  8. Petra E. Todd & Kenneth I. Wolpin, 2007. "The Production of Cognitive Achievement in Children: Home, School, and Racial Test Score Gaps," Journal of Human Capital, University of Chicago Press, vol. 1(1), pages 91-136.
  9. James Heckman & Flavio Cunha, 2007. "The Technology of Skill Formation," American Economic Review, American Economic Association, vol. 97(2), pages 31-47, May.
  10. Alessi, R & Michael Devereux & Guglielmo Weber, 1993. "Intertemporal consumption, durables and liquidity constraints: a cohort analysis," IFS Working Papers W93/07, Institute for Fiscal Studies.
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  12. Gary S. Becker & Nigel Tomes, . "Human Capital and the Rise and Fall of Families," University of Chicago - Population Research Center 84-10, Chicago - Population Research Center.
  13. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," University of Western Ontario, Economic Policy Research Institute Working Papers 20024, University of Western Ontario, Economic Policy Research Institute.
  14. Løken, Katrine Vellesen & Mogstad, Magne & Wiswall, Matthew, 2011. "What Linear Estimators Miss: The E ects of Family Income on Child Outcomes," Working Papers in Economics 02/11, University of Bergen, Department of Economics.
  15. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
  16. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
  17. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-81, September.
  18. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  19. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  20. Caucutt, Elizabeth M. & Kumar, Krishna B., 2003. "Higher education subsidies and heterogeneity: a dynamic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 27(8), pages 1459-1502, June.
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Cited by:
  1. Brant Abbott & Giovanni Gallipoli & Costas Meghir & Giovanni L. Violante, 2013. "Education Policy and Intergenerational Transfers in Equilibrium," NBER Working Papers 18782, National Bureau of Economic Research, Inc.

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