Policies for Early Childhood Skills Formation: Accounting for Parental Choices and Noncognitive Skills

Abstract What are the returns in terms of children’s skills development to child allowance policies? Answering this question requires a theory of the trade-offs faced by households, as well as a realistic technology of skills formation. I build a model of parental choices that embeds the technology of cognitive and non-cognitive skills formation estimated by Cunha, Heckman, and Schennach (2010), featuring risky investment in children, time use trade-offs, idiosyncratic income risk, and borrowing constraints. Accounting for non-cognitive skills implies higher effectiveness of parental investments, and therefore higher policy returns than previously estimated in the literature.