The Economics and Econometrics of Human Development

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A talk by Prof James Heckman, 2000 Nobel laureate in economics

Transcript of The Economics and Econometrics of Human Development

  • The Economics and the Econometrics of Human Development James J. Heckman University of Chicago March 31, 2014 Institute of Economic Growth New Delhi Econ and Ecom of Hum Dev
  • Intergenerational Mobility and Inequality: The Great Gatsby Curve IGE: ln Y1 Income in current generation = + ln Y0 Income of parents + India Source: Corak 2011, Inequality from generation to generation: the United States in Comparison. Notes: Inequality is measured post-taxes and transfers. Gini index dened on household income. IGE measured by pre-tax and transfer income of individual fathers and sons. The IGE estimate for India is taken from Hnatkovska et al. (2013). Econ and Ecom of Hum Dev
  • Link to Appendix I Econ and Ecom of Hum Dev
  • (a) Should there be policies that attempt to lower the IGE? (b) If so, what form should they take? Econ and Ecom of Hum Dev
  • Becker-Tomes-Solon Heritability Eciency of parental investment Inequality in wages Inequality of public provision of investment Econ and Ecom of Hum Dev
  • As a purely statistical matter, the more heterogeneity across units within an area the greater the estimated . Econ and Ecom of Hum Dev
  • Main ndings of the empirical literature Econ and Ecom of Hum Dev
  • Hart & Risley, 1995 Children enter school with meaningful dierences in vocabulary knowledge. 1. Emergence of the Problem In a typical hour, the average child hears: Family Actual Dierences in Quantity Actual Dierences in Quality Status of Words Heard of Words Heard Welfare 616 words 5 armatives, 11 prohibitions Working Class 1,251 words 12 armatives, 7 prohibitions Professional 2,153 words 32 armatives, 5 prohibitions Econ and Ecom of Hum Dev
  • Hart & Risley, 1995 Children enter school with meaningful dierences in vocabulary knowledge. 1. Emergence of the Problem In a typical hour, the average child hears: Family Actual Dierences in Quantity Actual Dierences in Quality Status of Words Heard of Words Heard Welfare 616 words 5 armatives, 11 prohibitions Working Class 1,251 words 12 armatives, 7 prohibitions Professional 2,153 words 32 armatives, 5 prohibitions 2. Cumulative Vocabulary at Age 3 Cumulative Vocabulary at Age 3 Children from welfare families: 500 words Children from working class families: 700 words Children from professional families: 1,100 words Econ and Ecom of Hum Dev
  • Understanding Mechanisms Econ and Ecom of Hum Dev
  • Capabilities, the Technology of Capability Formation, and the Essential Ingredients of a Life Cycle Model of Human Development Econ and Ecom of Hum Dev
  • Capabilities are multiple in nature. They encompass cognition, noncognitive and social preferences and personality and preference traits, as well as health. Vector of capabilities at age t: t. Capacities to act. Capabilities aect (a) resource constraints, (b) agent information sets and expectations, (c) parental information and expectations and (d) preferences. They are stable across situations but evolve over time. Econ and Ecom of Hum Dev
  • Dene relationships Mt mapping t to outcomes Yt at stage t of the life cycle as: Mt : t Yt. (1) A core low-dimensional set of capacities generates a variety of diverse outcomes. Econ and Ecom of Hum Dev
  • Technology of Capability Formation Cunha and Heckman (2007), Cunha (2007) t: a vector t+1 = ft( t self productivity and cross eects , It investment broadly dened (parents, environment) , P ,t parental capabilities ) (2) Econ and Ecom of Hum Dev
  • Complementarity Increases with Age 2 t+1 tIt t . Econ and Ecom of Hum Dev
  • Positive at later stages (t > t ) of childhood 2 t+1 tIt > 0, t > t . Some evidence suggesting 2 t+1 tIt 0, t < t , But even if positive, still smaller than at t > t . Econ and Ecom of Hum Dev
  • Complementarity coupled with self-productivity Dynamic Complementarity It t+1 t+1 t+s s > 1 2 t+s+1 ItIt+s > 0 Econ and Ecom of Hum Dev
  • Family Preferences for Child Outcomes Dierent versions of altruism, paternalism and beliefs about proper child rearing Econ and Ecom of Hum Dev
  • Family Resources Broadly Dened: Parental and Child Interactions with Financial Markets and Access to Support from External Institutions (a) Restrictions on transfers across generations (b) Restrictions on transfers within generations (parental lifetime liquidity constraints) (c) Public provision of investment; public policy towards children Econ and Ecom of Hum Dev
  • Other Constraints on The Family Actively Being Investigated (a) Information on parenting and other aspects of life across generations (b) Genes (c) Structure of household and assortative matching patterns (marriage markets) Econ and Ecom of Hum Dev
  • The Empirical and Theoretical Challenge A Life Cycle Framework for Organizing Studies and Integrating Evidence t: Capacities at t; It: investment at t; P ,t: Parental environmental variables t+1 = ft(t, It, P ,t): Technology of Skill Formation 1 0 1 2 T T +1 I1 I0 I1 I2 IT P ,1 P ,0 P ,1 P ,2 P ,T Prenatal Birth Early Childhood, 03 Later Childhood, 36 Adulthood and Beyond Econ and Ecom of Hum Dev
  • A Bare-Bones Model of Parental Investment Econ and Ecom of Hum Dev
  • The Problem of the Parent Link to Appendix II Econ and Ecom of Hum Dev
  • Life lasts four periods: Two periods as a passive child who makes no economic decisions (and whose consumption is ignored) but who receives investment in the form of goods. Two periods as a parent. Econ and Ecom of Hum Dev
  • Denote by 1 the initial capability level of a child drawn from the distribution J(1). (For notational simplicity, denote P,t = P = h.) Denoting by h the human capital of the child when child reaches adulthood Econ and Ecom of Hum Dev
  • Simplied parameterization of technology: t+1 = t 1,tt t + 2,tIt t investment + 3,tht parental human capital t t with 0 < 1,t, 2,t, 3,t, t 1, t 1, k k,nt = 1. Econ and Ecom of Hum Dev
  • Final Form Representation If T = 2, 1 = 2 = 1, 1 = 1, and 1 = 2 = 1, skills at adulthood, h = 3 = T+1 can be written as h = 2 1,21,1 1 + 1,22,1 Multiplier I 1 + 2,2I 2 + (3,2 + 1,23,1) h 1 . Econ and Ecom of Hum Dev
  • If = 1, then investments at dierent periods are (almost) perfect substitutes. Econ and Ecom of Hum Dev
  • Polar example arises in the Leontief case where : h = m2 h, 0, min(I1, I2) (3) Econ and Ecom of Hum Dev
  • u(): parental utility function : discount factor r: real interest rate : parental altruism c1, c2 are consumption in parental life cycle periods 1 and 2 Econ and Ecom of Hum Dev
  • The goal of the parent is to optimize: V (h, b, 1) = max c1,c2,I1,I2 u (c1) + u (c2) + 2 E [V (h , b , 1)] (4) subject to technology and budget constraints. Econ and Ecom of Hum Dev
  • Budget constraint is: c1 + I1 + c2 + I2 (1 + r) + b (1 + r)2 = wh + wh (1 + r) + b. (5) Econ and Ecom of Hum Dev
  • Tractable nal form technology: h = m2 h, 0, investment multiplier (I1) + (1 ) (I2) , (6) for 1 and 0 1, 1. Econ and Ecom of Hum Dev
  • I1 I2 = (1 ) (1 + r) 1 . (7) I1 I2 as , , and r . Econ and Ecom of Hum Dev
  • Important policy question: How easy (costly) is it to remediate low I1 with high I2? Econ and Ecom of Hum Dev
  • Implications of the Model Econ and Ecom of Hum Dev
  • Borrowing Limits Econ and Ecom of Hum Dev
  • Liquidity Constraints Within the Life Cycles of Parents The parent, within his/her lifetime, faces a sequence of constraints at each stage of the life of the child. Econ and Ecom of Hum Dev