Discussion Paper 132

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Efficient Investment in Children

S. Rao Aiyagari
Jeremy Greenwood
Ananth Seshadri

Published December 1, 1999

Abstract
Many would say that children are society’s most precious resource. So, how should it 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 for the framework is characterized. Next, this is compared with the case of incomplete financial markets. Then, the situation where childcare markets are also lacking is examined. Additionally, the effects of impure altruism are analyzed.


Published In: Journal of Economic Theory (Vol. 102, No. 2, February 2002, pp. 290-321)

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