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Efficient Child Care Subsidies

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  • Christine Ho
  • Nicola Pavoni

Abstract

We study the design of child care subsidies in an optimal welfare problem with heterogeneous private market productivities. The optimal subsidy schedule is qualitatively similar to the existing US scheme. Efficiency mandates a subsidy on formal child care costs, with higher subsidies paid to lower income earners and a kink as a function of child care expenditure. Marginal labor income tax rates are set lower than the labor wedges, with the potential to generate negative marginal tax rates. We calibrate our simple model to features of the US labor market and focus on single mothers with children aged below 6. The optimal program provides stronger participation but milder intensive margin incentives for low-income earners with subsidy rates starting very high and decreasing with income more steeply than those in the United States.

Suggested Citation

  • Christine Ho & Nicola Pavoni, 2020. "Efficient Child Care Subsidies," American Economic Review, American Economic Association, vol. 110(1), pages 162-199, January.
    • Handle: RePEc:aea:aecrev:v:110:y:2020:i:1:p:162-99
    DOI: 10.1257/aer.20170581
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    References listed on IDEAS

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    1. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-467, March.
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    Cited by:

    1. Spencer Bastani & Sebastian Koehne, 2024. "How Should Consumption Be Taxed?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 80(3), pages 259-302.
    2. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2020. "Pareto efficient income taxation without single-crossing," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 55(3), pages 547-594, October.
    3. Takuya Obara & Yoshitomo Ogawa, 2025. "Optimal Nonlinear Income Taxation for Noncooperative Couples," Discussion Paper Series 291, School of Economics, Kwansei Gakuin University, revised Mar 2026.
    4. Helene Turon, 2022. "The Labour Supply of Mothers," Bristol Economics Discussion Papers 22/769, School of Economics, University of Bristol, UK.
    5. Takuya Obara & Yoshitomo Ogawa, 2024. "Optimal taxation in an endogenous fertility model with non-cooperative behavior," Review of Economics of the Household, Springer, vol. 22(1), pages 173-197, March.
    6. Koka, Katerina & Rapallini, Chiara, 2023. "Italy’s demographic trap: Voting for childcare subsidies and fertility outcomes," European Journal of Political Economy, Elsevier, vol. 76(C).
    7. Komada, Oliwia, 2024. "Raising America’s future: Search for optimal child-related transfers," Economic Modelling, Elsevier, vol. 138(C).
    8. Hassani Nezhad, Lena, 2020. "Female Employment and Childcare," IZA Discussion Papers 13839, IZA Network @ LISER.
    9. Robayo, Monica & Rude, Britta Laurin, 2023. "Preparatory School Years and Maternal Employment in Romania," Policy Research Working Paper Series 10638, The World Bank.
    10. Emily Moschini & Monica Tran-Xuan, 2025. "Family Policies and Child Skill Accumulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 56, April.
    11. Joseph Mullins, 2022. "Designing Cash Transfers in the Presence of Children's Human Capital Formation," Working Papers 2022-019, Human Capital and Economic Opportunity Working Group.
    12. Oliwia Komada, 2023. "Raising America's future: search for optimal child-related transfers," GRAPE Working Papers 84, GRAPE Group for Research in Applied Economics.
    13. Hanna Wang, 2025. "Fertility and Family Leave Policies in Germany: Optimal Policy Design in a Dynamic Framework," Working Papers 1507, Barcelona School of Economics.
    14. Hanna Wang, 2026. "Fertility and Family Leave Policies in Germany: Optimal Policy Design in a Dynamic FrameworK," CESifo Working Paper Series 12416, CESifo.
    15. Alessandra Casarico & Elena Del Rey & Jose I. Silva, 2023. "Child care costs, household liquidity constraints, and gender inequality," Journal of Population Economics, Springer;European Society for Population Economics, vol. 36(3), pages 1461-1487, July.
    16. Bastani, Spencer & Blomquist, Sören & Gahvari, Firouz & Micheletto, Luca & Tayibov, Khayyam, 2025. "Optimal housing taxation with land scarcity and maintenance: A Mirrleesian perspective," European Economic Review, Elsevier, vol. 178(C).
    17. Christine Ho, 2025. "Bridging generations: Intergenerational transfers and time use in a changing world," Review of Economics of the Household, Springer, vol. 23(3), pages 869-876, September.
    18. Takuya Obara & Yoshitomo Ogawa, 2020. "Optimal Taxation in an Endogenous Fertility Model with Non-Cooperative Couples," Discussion Paper Series 211, School of Economics, Kwansei Gakuin University, revised Jan 2021.
    19. Koehne, Sebastian & Sachs, Dominik, 2022. "Pareto-improving reforms of tax deductions," European Economic Review, Elsevier, vol. 148(C).

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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