The Production of Human Capital: Endowments, Investments and Fertility

51 Pages Posted: 30 Sep 2012

See all articles by Anna Aizer

Anna Aizer

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Flavio Cunha

University of Pennsylvania - Department of Economics

Date Written: September 2012

Abstract

We study how endowments, investments and fertility interact to produce human capital in childhood. We begin by providing empirical support for two key features of existing models of human capital: that investments and existing human capital are complements in the production of later human capital (dynamic complementarity) and that parents invest more in children with higher endowments due to the complementarity between endowments and investments (static complementarity). For the former, we exploit an exogenous source of investment, the launch of Head Start in 1966, and estimate greater gains from preschool in the IQ of those with the highest stocks of early human capital, consistent with dynamic complementarity. For the latter, we are able to overcome the potential endogeneity and measurement error associated with traditional measures of endowment based on health at birth. When we do, we find that parents invest more in highly endowed children. Moreover, we find that the degree of reinforcement increases with family size. Thus, an increase in quantity leads not only to a decline in average quality (the quantity-quality tradeoff) but to an increase in the variation in quality, due to both greater variation in endowments (from more children) and greater reinforcing investments. These findings can be explained by extending the quantity-quality trade-off model to include heterogeneous child endowments and parental preferences that feature complementarity between quality and quantity and moderate aversion to inequality in child human capital within the household.

Suggested Citation

Aizer, Anna and Cunha, Flavio, The Production of Human Capital: Endowments, Investments and Fertility (September 2012). NBER Working Paper No. w18429. Available at SSRN: https://ssrn.com/abstract=2154107

Anna Aizer (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-3836 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Flavio Cunha

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
Room 527
Philadelphia, PA 19104
United States
215-898-5652 (Phone)

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