Abstract
AbstractHouseholds may invest in the human capital development of their children not only for altruistic reasons but also as insurance against future income shocks. Therefore, the allocation of the child's time between school and work is a function of the risk preference of the household head. This paper analyzes the relationship between parental risk preferences and child labor decisions using recall information on child labor and a risk elicitation question. Results reveal that risk‐averse households are more likely to send their children to work. Endogeneity issues are addressed by employing instrumental variables. These results suggest that child labor may be driven by the need to maximize the household's expected income from the child. Regarding heterogeneity, we find that the child labor effect of risk‐aversion is higher for older children. Furthermore, the father's risk‐aversion matters for the probability of child labor, while the intensity of child labor increases with the mother's risk‐aversion. The findings call for an understanding of the behavioral context of the affected households and how risk preferences can affect the success of proposed policies to reduce child labor.
Highlights
The literature indicates that income constraints on households and adverse economic shocks increase the probability of child labor
Parental risk preferences are commonly linked to education decisions
The risk preference of households could have an independent effect on child labor, aside from the indirect impact through education and school enrollment
Summary
The literature suggests that heads of households make investments into education to increase the human capital of their children. Despite the potential impact of the parent's risk preference on child labor decisions, the literature has considered this relationship only indirectly: Studies that relate risk preference to human capital investment have examined schooling and school enrollment-related variables (Belzil & Leonardi, 2013; Checchi et al, 2014; Mukherjee & Pal, 2016; Tabetando, 2019; Wölfel & Heineck, 2012). Our results show that children who live in households that are headed by a risk-averse person are more likely to engage in child labor. This relationship between risk-aversion and child labor persists after controlling for numerous confounding variables.
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