Investing in the Next Generation: The Long-Run Impacts of a Liquidity Shock

Patrick Agte, Arielle Bernhardt, Erica M. Field, Rohini Pande and Natalia Rigol

No 29816, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How do poor entrepreneurs trade off investments in business enterprises versus children's human capital, and how do these choices influence intergenerational socio-economic mobility? To examine this, we exploit experimental variation in household income resulting from a one-time relaxation of household liquidity constraints (Field et al., 2013), and track schooling and business outcomes over the subsequent 11 years. On average, treatment households, who were made wealthier through the experiment, increase human capital investment such that their children are 35% more likely to attend college. However, schooling gains only accrue to children with literate parents, among whom college attendance nearly doubles. In contrast, treatment effects on investment among the illiterate accrue only on the business margin and are accompanied by adverse educational outcomes for children. As a result, treatment lowers relative educational mobility. In a forecasting exercise, we find that earnings gains for literate households are four times larger than the earnings gains for illiterate households, raising earnings inequality. Our findings highlight how parental investment choices can contribute to a growth in intergenerational earnings inequality despite reductions in urban poverty.

JEL-codes: G32 I24 I25 I26 I32 L26 O1 O15 O16 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-ent, nep-exp, nep-fdg and nep-lab
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