Parents' Discount Rates for Child Quality

Abstract

Contemporary discussions of economic growth make human capital or knowledge accumulation its primary engine [25]. Human capital as the lead component of the stock of wealth defines a developed economy. Becker and Murphy [4] show that human capital both increases and is increased by the scope of the market. Its rate of return rises with the size of its stock [5]. Human capital also plays significant roles in models of human fertility choice [40], population and environmental degradation [11; 34], capital mobility [3], and endogenous technological progress [33]. A substantial portion of an adult's human capital is accumulated during childhood. Children as children, however, cannot independently contract for the resources required to support investments in this human capital. Though nearly every society grants parents wide discretion about the nurture they provide their children, little is understood about what motivates investment by one generation in another, the relative importance of different investment modes, or the discount rates which parents apply. Whatever the motivation and the mode, because of the long time span between birth and adulthood, parents' discount rates potentially exert great leverage upon the investment decisions they make for their children. Knowledge of these discount rates is a prerequisite to acquiring an improved understanding of the internal decision processes of the household, a collective decision unit which economics mostly treats as a black box.1 Important policy questions, as well as scientific accuracy and logical consistency, demand knowledge of the discount rates parents apply to investments in their children. Healthier, better educated, and wealthier children have a better chance in life. But there is no evident reason to suppose that intrafamily discount rates are socially optimal.2 Many of the private reactions and behaviors which reinforce or temper the intended effects of public policies are internal to the household. When these intended effects have a substantial temporal dimension, parental discount rates will be influential. For example, increased public investments in children can be neutralized