Child Skill Production: Accounting for Parental and Market-Based Time and Goods Investments

Abstract

Families invest time, home goods/services, and market-based childcare in their children. We study these investments, focusing on the role of parental human capital and the substitutability of inputs in skill production. We develop a relative demand estimation strategy that uses intratemporal optimality to estimate the substitutability and relative productivity of inputs. We show how relative demand restrictions simplify and improve estimation of the dynamics of skill production. We estimate the skill production technology for American children aged 5–12, finding moderately strong complementarity between inputs and little difference in the technology by parental education. Counterfactual simulations show that estimated input complementarity has important implications for policies that subsidize inputs or provide free childcare.