Investing in the Youngest: The Optimal Child Care Policy

31 Pages Posted: 26 Jul 2013

Date Written: June 21, 2013


The aim of the paper is to characterize the optimal child care policies (subsidies and state provision), assuming that child care provision affects the child’s future abilities. Public intervention is needed since two sources of economic inefficiency are contemporaneously influential: parents do not properly account for the impact of child care on future generations (human capital externalities) and income tax is distortive, hence labour supply is suboptimal. In an optimal income tax model, altruistic parents provide child care either by providing care at home or by paying for it on the market. If the government is able to observe the amount of domestic care provided by parents, it is optimal to subsidize provision of paid child care if only to correct the human capital externality. If, conversely, it is not possible to observe the amount of domestic care, market-provided child care is subsidized, including for redistributive reasons. In fact, an efficiency case for higher child care subsidies to lower income earners arises. State provision of child care may be desirable when market care purchases cannot be observed at the household level.

Keywords: optimal taxation, household production, child care, intergenerational transfers, warm-glow altruism

JEL Classification: H21, H23, H53, J13, J22, J24

Suggested Citation

Carta, Francesca, Investing in the Youngest: The Optimal Child Care Policy (June 21, 2013). Bank of Italy Occasional Paper No. 180, Available at SSRN: or

Francesca Carta (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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