Child health, human capital, and adult financial behavior.

Abstract

This paper provides novel evidence that child health affects adult financial behavior, that is, risky asset market participation. We do so by using a longitudinal dataset with a rich set of covariates and exploit sibling fixed-effects (FE) to control for invariant unobserved heterogeneity. We begin by proposing a new mechanism working via skill formation and portfolio choice. To be precise, we test two hypotheses. First, we expect a negative correlation between poor child health and risky asset market participation. Second, this correlation should be mostly explained by differences in skills. To test these hypotheses, we use data from the National Longitudinal Study of Youth 1979 (NLSY79). Our results show that poor child health is associated with an 11 pp decrease in adult risky market participation conditional on demographics and family background. Moreover, our results suggest that disruption in pre-labor market skill formation is a main mediator of this relationship. These results are robust to a wide range of robustness checks. Our findings have implications for the design of health policies and policies intended to increase financial literacy and asset market participation.