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

  • Lance Lochner

    (University of Western Ontario)

  • Elizabeth Caucutt

    (University of Western Ontario)

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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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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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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