EARLY CHILDHOOD HUMAN CAPITAL INVESTMENT IN CHILDREN

Abstract

Early childhood investment is extremely important in forming the human capital. In order to understand the investment during this period, a human capital production function which takes parental skills, and investments as inputs and produce outcomes for children is needed. A well-known problem with the estimation of such production functions is the simultaneity of the inputs (time spent with children and income). Therefore the education production function suffers from a similar problem. However, because the output of the intergenerational education production (i.e., completed education level) is determined across generations while the inputs, such as parental time investment, are determined over the life-cycle of each generation, one can treat these inputs as predetermined and use instruments from within the system to estimate the production function. This procedure in a systems of equations framework can be estimated by a three stage least squares (3SLS) estimator. Using data on two generations from the Panel Study of Income Dynamics (PSID), this paper estimates the effect of parental characteristics and human capital investments on their children’s education outcomes in a 3SLS framework.