Efficient Investment in Children

Many would say that children are society’s most precious resource. So, how should we invest in them? To gain insight into this question, a dynamic general equilibrium model is developed where children differ by ability. Parents invest time and money in their offspring, depending on their altruism. This allows their children to grow up as more productive adults. First, the efficient allocation is characterized. Next, this is compared with the outcome that arises when financial markets are incomplete. The situation where childcare markets are also lacking is then examined. Additionally, the consequences of impure altruism are analyzed. Journal of Economic Literature Classification Numbers: D1, D31, D58, I2. Date: May, 2001