Inter-generational Income Sharing and Schooling Investments

This paper undertakes a theoretical and empirical analysis of the hypothesis that the value of the inter-generational family unit in smoothing life cycle consumption affects the schooling decisions which parents make in their children. The theoretical analysis of this paper shows that the effects of schooling depend on assumptions regarding income-age profiles, commitment to the contract, and the availability of a storage good. Under a certain set of assumptions, parental dependence on children for old-age consumption support will reduce the schooling of both boys and girls. This suggests an alternative explanation for the observed positive effect of economic growth on schooling, through the negative effect of growth on the relative profitability of the family contract. The empirical analysis uses a 1996 cross-section of data on Indian urban and rural households to show that parental dependence on children does, indeed, reduce schooling investments in children.