Income Shocks and Parental Preference for Equality in Education Outcomes

Magda Tsaneva, University of Maryland

This paper examines the role of parental preferences in human capital accumulation and studies whether some children in the household are better insured than their siblings from income shocks. Using data from Indonesia around the time of the economic crisis in late 1990s, I estimate a structural model which describes the relationship between production of skills and investment allocation decisions, implied by a utility-maximization problem for households with two children. The main finding of this analysis is that, on average, parental investment in children does not reinforce differences in skills. Households who experienced a large income shock, however, allocated resources according to efficiency motives. Further, parents were more sensitive to the human capital of younger female children, penalizing them for low skills. The implication of this finding is that young female children are potentially less likely to be fully insured from the negative effects of an income shock compared to their older siblings of either gender.