Start What You Finish! Ex Ante Risk and Schooling Investments in the Presence of Dynamic Complementarities

95 Pages Posted: 16 Sep 2020

See all articles by Andrew D. Foster

Andrew D. Foster

Brown University - Department of Economics; Brown University - Watson Institute for International and Public Affairs

Esther Gehrke

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE)

Date Written: June 11, 2020

Abstract

We study the relationship between risk and schooling investment in a low income setting, with a particular focus on possible ex ante effects. We first present a model that shows that such effects can arise if the human capital production function exhibits dynamic complementarity and parental preferences for human capital are not too concave. We then estimate the key parameters of the model using multiple rounds of panel data from rural India that contain, in each round, three seasons of time allocation for each sampled child. These estimates suggest an elasticity of schooling investments with respect to risk of -0.09 in this context. We then use cross-round differences in village-level irrigation interacted with rainfall variability to estimate the relationship between income risk and school time. Using this variation, we find an estimated elasticity of study time with respect to risk between -0.05 and -0.04. Finally, we simulate the effects of an implicit social insurance program, modeled after the National Rural Employment Guarantee Scheme (NREGS). Our results suggest that the risk-reducing effect of the NREGS may offset adverse effects on child education that were evident during the NREGS phase-in due to rising wages.

Keywords: Risk, Human capital, Dynamic complementarity, India

JEL Classification: D81, I21, J22, O12

Suggested Citation

Foster, Andrew D. and Gehrke, Esther, Start What You Finish! Ex Ante Risk and Schooling Investments in the Presence of Dynamic Complementarities (June 11, 2020). Available at SSRN: https://ssrn.com/abstract=3666439 or http://dx.doi.org/10.2139/ssrn.3666439

Andrew D. Foster (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-2537 (Phone)

Brown University - Watson Institute for International and Public Affairs ( email )

111 Thayer Street
Box 1970
Providence, RI 02912-1970
United States

Esther Gehrke

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE) ( email )

Tulpenfeld 4
Bonn, 53113
Germany

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