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

61 Pages Posted: 27 Oct 2012 Last revised: 14 Jul 2022

See all articles by Elizabeth M. Caucutt

Elizabeth M. Caucutt

University of Western Ontario - Department of Economics

Lance Lochner

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

Date Written: October 2012

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 evidence from the Children of the NLSY (CNLSY) which suggests that borrowing constraints bind for 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 when credit markets are imperfect. We analytically establish the importance of dynamic complementarity in investment for the qualitative nature of investment responses to income and policy changes. We extend the framework to incorporate dynasties and use data from the CNLSY to calibrate the model. Our benchmark steady state suggests that roughly half of young parents and 12% of old parents are borrowing constrained, while older children are unconstrained. We also identify strong complementarity between early and late investments, suggesting that policies targeted to one stage of development tend to have similar effects on investment in both stages. 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. A key lesson is that the interaction between dynamic complementarity and early borrowing constraints means that early interventions tend to be more successful than later interventions at improving human capital outcomes.

Suggested Citation

Caucutt, Elizabeth M. and Lochner, Lance, Early and Late Human Capital Investments, Borrowing Constraints, and the Family (October 2012). NBER Working Paper No. w18493, Available at SSRN: https://ssrn.com/abstract=2167596

Elizabeth M. Caucutt (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

Lance Lochner

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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