Factories and Farms: How Does Economic Growth Impact Rural Educational Investment?

Do households in high growth regions invest more in education because their incomes are growing or because growth raises their returns to education? What is the relative contribution of these channels to explaining education choices? To answer these questions, this paper exploits variation in the demand for skill and land in two major sectors of rural India agriculture and manufacturing. To guide my empirical analysis, I build a model of household education choices. The model generates three testable predictions on how changes to the economic environment alter returns to education and household incomes and how changes in these determinants of education decision rules feed through to education choices. I test the predictions of the model using district and household level data from India between 1983 and 1999. My results indicate that household income and educational investment responses to changes in the economic environment vary with the existing distribution of asset and skill endowments in an economy. I examine the decision of rural landless households to send their children to school. Rural educational investment among these households is low one in three children of primary school age didn’t attend school during the 1990s. I find that male education responds positively to increases in income and returns to education, and that the income effect is substantially larger in magnitude than the returns to education effect.