Investment in Children’s Human Capital: Implications of PROGRESA†

This paper investigates the effects of an educational subsidy program in Mexico, the PROGRESA, on investment in children’s human capital. I develop a dynamic behavioral model that determines household’s investment in children’s human capital and presents factors that may reduce education levels. The model implies that when parents use children’s earnings as a source of household income, presence of credit constraints causes parents’ investment in children’s human capital to be sub-optimal where the returns to schooling exceeds the returns to capital. Educational subsidies such as the PROGRESA may increase human capital investment by relieving credit constraints. I calibrate the model and quantify the effects of the subsidies by household size and ability of children. I find that the subsidies increase children’s years of schooling and enrollment rate, which increase human capital accumulation by 12%. Findings suggest that the effects of subsidies are greater for children from larger families who might be more borrowing constrained. Furthermore, educational subsidies conditional on schooling are more effective than alternative policy methods such as monetary transfer without conditioning or a low interest loan. JEL Classification: J24, I21, H52.