Correlation, Consumption, Confusion, or Constraints: Why Do Poor Children Perform so Poorly?

Date01 January 2017
DOIhttp://doi.org/10.1111/sjoe.12195
Published date01 January 2017
AuthorLance Lochner,Elizabeth M. Caucutt,Youngmin Park
Scand. J. of Economics 119(1), 102–147, 2017
DOI: 10.1111/sjoe.12195
Correlation, Consumption, Confusion,
or Constraints: Why Do Poor
Children Perform so Poorly?
Elizabeth M. Caucutt
University of Western Ontario, London, ON N6A 5C2, Canada
ecaucutt@uwo.ca
Lance Lochner
University of Western Ontario, London, ON N6A 5C2, Canada
llochner@uwo.ca
Youngmin Park
University of Western Ontario, London, ON N6A 5C2, Canada
ypark96@uwo.ca
Abstract
Early developing and persistent gaps in child achievement by family income combined with
the importance of adolescent skill levels for schooling and lifetime earnings suggest that a key
component of intergenerational mobility is determined before individuals enter school. After
documenting important differences in early child investments by family income, we study
four leading mechanisms thought to explain these gaps: intergenerational ability correlation,
consumption value of investment, information frictions, and credit constraints. We evaluate
whether these mechanisms are consistent with other stylized facts related to the marginal
returns on investments and the effects of parental income on child investments and skills.
Keywords: Credit constraints; human capital; intergenerational mobility; uncertainty
JEL classification:D84; D91; I24; I26; J24
I. Introduction
Adolescent skill and achievement gaps by parental income can explain a
substantial share of subsequent differences in educational attainment and
lifetime earnings (Keane and Wolpin, 1997; Cameron and Heckman, 1998;
Carneiro and Heckman, 2002), suggesting that an important component of
intergenerational economic and social mobility is determined by the time
For helpful comments, we thank participants at the 2014 HCEO Conference on Social
Mobility at the University of Chicago. We also thank Eda Bozkurt and Qian Liu for excellent
research assistance. Caucutt and Lochner gratefully acknowledge support from CIGI-INET
Research Grants.
CThe editors of The Scandinavian Journal of Economics 2016.
E. Caucutt, L. Lochner, and Y. Park 103
children reach adolescence. Perhaps more troubling, sizeable differences
in achievement by parental income are already evident by very young
ages, persisting throughout childhood (Carneiro and Heckman, 2002; Cunha
et al., 2006; Cunha and Heckman, 2007; Cunha, 2013). This raises the
possibility that a generation’s fate might be sealed by the time it enters
school.1Altogether, this evidence suggests that a complete understanding
of intergenerational mobility and its implications for economic and social
policy requires convincing answers to the vexing question: why do poor
children perform so poorly?
Given the importance of family investments for early child development
(Todd and Wolpin, 2007; Cunha and Heckman, 2008; Cunha et al., 2010;
Del Boca et al., 2014; Pavan, 2014), we concentrate on understanding why
low-income families invest so much less in their young children compared
to higher-income families (Guryan et al., 2008; Kaushal et al., 2011). We
consider four broad mechanisms often thought to explain early investment
and achievement gaps by family income.
1. The natural ability of children and parents might be correlated (Becker
and Tomes, 1979, 1986). If child achievement is an increasing function
of own ability, then a positive intergenerational ability correlation can
generate the income–achievement gradients documented in the litera-
ture.
2. Parents might enjoy making investments in their children. If investments
provide a direct benefit to parents above and beyond the future labor
market returns to children, then parents will choose to invest more as
their income rises, in a similar way as they would purchase more of
any other normal good (Lazear, 1977). It is also possible that low- and
high-income families place different intrinsic value on investments or
human capital more generally (Abbott et al., 2013).
3. Low-income parents might be poorly informed about the productivity
of, or returns to investments in, their children (Cunha et al., 2013;
Cunha, 2014; Dizon-Ross, 2015). For example, poor parents might
incorrectly believe that investments in their young children are unpro-
ductive (or poorly rewarded in the labor market), or they might simply
face greater uncertainty in the productivity of or returns to investments.
Alternatively, poor parents might recognize the importance of investing
in their children, but they might not know which types of investment
activities/goods are most productive.
4. Poor families might be unable to invest efficiently in their children due
to limits on their capacity to borrow against their own future income
1Recent studies show that these early achievement and educational attainment gaps have
been growing in the United States for decades (Belley and Lochner, 2007; Reardon, 2011).
CThe editors of The Scandinavian Journal of Economics 2016.
104 Why do poor children perform so poorly?
or against the potentially high returns on investments in their children
(Becker and Tomes, 1979, 1986; Caucutt and Lochner, 2006, 2012;
Cunha et al., 2006; Cunha and Heckman, 2007; Cunha, 2013; Lee and
Seshadri, 2014).
We use a simple framework of dynamic human capital investment to
formally examine whether these mechanisms are also able to account for
other important stylized facts in the literature on child development. In par-
ticular, we focus on four well-established findings related to the marginal
returns to early investment and the role of family income: (i) the high
marginal returns to early investments for economically disadvantaged chil-
dren; (ii) lower returns on marginal investments for higher-income children;
(iii) exogenous increases in family income leading to greater investments in
children and improved childhood outcomes; (iv) the impacts of income on
child investments, achievement, and educational attainment being greater if
the income is earned (or received) when children are young.2While our
analysis is not intended to determine which mechanism is most important
for explaining income-based achievement gaps, it is useful for helping us
to understand which mechanisms are needed to provide a more complete
picture of the child development process and the role of family income.3
This is important because the different mechanisms can have very differ-
ent policy implications. For example, if investment and achievement gaps
are driven only by intergenerational ability correlations or a “consump-
tion” value of investment, then investments in children are likely to be
economically efficient (in the absence of human capital externalities) and
policies designed to improve equity will be inefficient.4By contrast, either
information-based or credit market frictions can lead to inefficiently low
investments in economically disadvantaged children. In this case, it might
be possible to simultaneously improve both equity and efficiency through
well-designed policies.
We organize this paper in the following way. In Section II, we briefly
document differences in child achievement and investment levels by family
2We also briefly discuss other evidence related to specific mechanisms in Sections V–VIII
where those mechanisms are considered in detail.
3See Cunha (2014) for a novel effort to empirically decompose the relative importance of a
similar set of mechanisms using unique data on parental perceptions and stated choices about
investments in children under different hypothetical budget sets. While we do not empirically
evaluate the relative importance of different mechanisms, our theoretical analysis is based
on a more general dynamic human capital investment model. We consider a wide range of
information frictions and explicitly model intertemporal borrowing constraints.
4Of course, it might be socially desirable to encourage investment beyond the privately
optimal amount due to human capital externalities in production (Moretti, 2004a, 2004b) or
related to crime (Lochner and Moretti, 2004) or citizenship (Milligan et al., 2004).
CThe editors of The Scandinavian Journal of Economics 2016.

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