Munich Personal RePEc Archive

Education as a precautionary asset

Cipollone, Angela (2011): Education as a precautionary asset.

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Abstract

By using data from the latest wave of the Indonesia Life Family Survey, the present work investigates whether and to which extent child time allocation depends on the joint impact of liquidity constraints and risk attitudes. We employ a double selection model of school hours, by adding time preferences, risk attitudes and proxies of risks and shocks among the relevant regressors, and controlling for sample selection and endogeneity of liquidity constraints and school enrolment. To this aim, we exploit measures of time preferences and risk attitudes elicited from individuals’ responses to hypothetical gambles and consider the past occurrence of shocks to proxy the risk profiles of the households under the assumption that households use past income volatility to predict future volatility. It will be shown that, under liquidity constraints, risk averse parents raise a precautionary demand for education as an ex-ante risk coping strategy, so to insure future consumption through higher returns from their children’s work.

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