Abstract
Empirical research documents persistent socioeconomic and race gaps in parental investments in children. This article presents a formal model that describes the process through which parents’ beliefs about the returns on investments in children evolve over time in light of new information that they receive regarding the outcomes of past investments. The model, which is based on Bayesian learning, accounts for how parents of low socioeconomic status may come to underinvest in their children because they have false low beliefs about the returns on investments. Moreover, the model describes how beliefs are transmitted across generations, thus creating dynasties of underinvesting parents who reproduce inequalities in children’s socioeconomic outcomes. Finally, this article uses National Longitudinal Survey of Youth data to provide illustrative empirical evidence on key aspects of the proposed model. The main contribution of this article is to integrate parents’ beliefs about returns on investments into existing models of intergenerational transmissions.
Highlights
Practitioners of empirical analyses based on Rational Choice Theory have long been aware that when individuals face various choices, they are rarely fully informed about what options they have and the returns on their choices, but rather base their decisions on personal beliefs and attitudes (Breen, 1999; Morgan, 2005; Piketty, 1995)
This article proposes a formal model to explain the mechanisms through which these gaps in parental investments come to be and how they persist across generations
The main contribution of the article is to propose a formal model that clarifies the role of parental beliefs in the returns on their investments, a concept traditionally missing from models of intergenerational transmission of resources and human capital accumulation (e.g. Becker and Tomes, 1986; Cunha et al, 2006))
Summary
Practitioners of empirical analyses based on Rational Choice Theory have long been aware that when individuals face various choices, they are rarely fully informed about what options they have and the returns on their choices, but rather base their decisions on personal beliefs and attitudes (Breen, 1999; Morgan, 2005; Piketty, 1995). The proposed model leads to two steady-state beliefs (or equilibria) in which new signals about academic success or failure do not change parents’ beliefs These beliefs lead to underinvestment in the child, which causes investment gaps that are conditioned on prior beliefs and on other factors, such as SES and race. Introducing a generation subscript g ∈{c, p} for child and parents, respectively, this type of transmission mechanism (Breen, 1999; Piketty, 1995) is formalized as z0c = zTp (6) This simple model of belief transmission means that a child’s initial beliefs can only be either the true belief or his or her parents’ CLE, assuming that parents have had sufficient time to adopt a steady state at time Parents with high levels of investment do not respond to the signals they receive from their child because they are already convinced (rightly) that they know the actual returns on their investments
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