Understanding How Parents Affect Children: A General Perspective and Some Selected Examples

1. Understanding How Parents Affect Children: A General Perspective and Some Selected Examples Jere R. Behrman William R. Kenan, Jr. Professor of Economics University of Pennsylvania AMID & CAM, University of Copenhagen Copenhagen, Denmark 9-10 June 2004

2. Strong Associations of Persistent Parental Characteristics & Child Economic Success Parent-Child Earnings: Annual data suggest children in the US have $0.20 greater earnings for every $1.00 greater parental income, implying substantial mobility. But longer-run earnings imply $0.60 -- much less intergenerational mobility (Behrman & Taubman REW 1990; Solon AER 1992; Zimmerman AER 1992). Parental Income-Child Schooling: Also associations between are much stronger than reported in earlier studies for many countries if longer-run income measures are used and more dimensions than just enrollment or grades completed are considered even for the relatively equalitarian Vietnamese society (Behrman & Knowles WBER 1999). A child from a household with income one standard deviation above the mean versus one standard deviation below starts school earlier, passes successfully 94% rather than 80% of her/his classes, completes 2.2 years more grades, and scores higher on examinations. The combined implications of these differences is equal to 13.1% of life-time income.

3. Thus such studies suggest for widely diverse societies that persistent effects of parents that are associated with their long-run income and wealth are very important in confering economic advantages to their children. However, while suggesting considerable impact of persistent parental characteristics on child economic success, such estimates do not identify what characteristics are important.

4. Problem: Confounding Effects of Unobserved Endowments (e.g., Genetics) Consider simple case in which child schooling Sc depends on parental schooling Sp, parental endowments Ep and a stochastic term u: (1) Sc = aSp + bEp + u Want to obtain good estimate of a, the effect of parental schooling on child schooling. But if Ep is not controlled when estimating a and if Sp and Ep are correlated, the estimate of a will be biased because Sp represents in part the effects of Ep. And such correlation likely because investments in schooling for parents likely to be in response to their endowments.

5. Possible Solution 1: Experiments with Random Assignment of Treatment Use experimental method to break correlation between Sp and Ep by randomly assigning Sp. But while random assignment of some right-side variables may be feasible, for others – including parental schooling – implementing such an experimental is likely to be very difficult.

6. Possible Solution 2: Identical Twins Data to Control for Endowments Simple idea. If relation (1) is for one identical twin, then (1’) can be written for other twin: (1’) S’c = aS’p + bE’p + u’ Subtracting (1’) from (1): (2) Sc - S’c = a(Sp- S’p) + b(Ep- E’p) + (u – u’) Then, even if endowments are not observed, if identical twins have identical endowments (identical genetics at conception, identical family background), (Ep- E’p) = 0 so no bias if estimate parameter a from relation (2).

7. Note: - sibling data are not sufficient - assumes parental schooling differences due to random events - above assumes that parents are identical twins married to identical twins (but modified below)

8. Wage relations with earnings endowments (Ee): (3) W = aS + bEe + u Where schooling S determined by endowments Ee and family background F and stochastic term v: (4) S = cEe + dF + v Within identical twins estimates for parameter a, dating back to Behrman & Taubman AER 1977. Are Endowments Important in Economics?

9. OLS vs Twins % Returns to Schooling:US (Ashenfelter & Rouse QJE 1998; Behrman & Rosenzweig EER 1999; Behrman, Rosenzweig & Taubman JPE 1994) and Australia (Miller, Mulvey & Martin AER 1995)

10. % Biases in OLS Estimates of Earnings Returns to Schooling

11. Direct Estimates of Schooling Investment Responses to Endowments Use identical twins to obtain “right” parameter estimates and then fraternal twins to obtain endowment responses in relations (3) and (4) (Behrman, Rozenzweig & Taubman JPE 1994 and REStat 1996). Find that over a quarter of variation in ln earnings due to individual endowment differences. Therefore endowment responses substantial for both quantity and quality of schooling.

12. Now Turn to Three Ways in Which Parents Affect Child Economic Outcomes • For the first and second, recent estimates Illustrate importance of controlling for endowments to understand causal effects though large literatures exist without such controls. • The third illustrates another channel, beyond those usually studied, through which parents affect adult child economic welfare.

13. 1. Impact of Parents’ Schooling on Child Schooling in US(Behrman & Rosenzweig AER 2002) Strong emphasis on critical role of parents’, particularly mother’s, schooling. But interpretation difficult because: • Intergenerationally correlated endowments • Assortative mating Basically extend (1) to include both parents (1A) Sc = aSm + bEm + cSf + dEf + u Add assortative mating relation: (5) Sf = mSm + nEm + v

14. Assortative Mating: Impact of Additional Year of Own Schooling on Additional Year of Spouse’s Schooling (Relation 5) – Association Because Spouse More Schooled (though less so in standard estimates) AND Has More Endowments

15. Impact of Additional Year of Mother’s Schooling (Sm)on Child Schooling (w/o and w Father’s Schooling Sf) (Note: Controlling for Endowments, More Schooled Women Spend More Time in Labor Market)

16. Impact of Additional Year of Father’s Schooling (Sf) on Child Schooling (w/o and w Sm)

17. Implications • Conventional wisdom that mother’s schooling has large positive impact on child schooling wrong because failure to control for endowments and assortative mating biases upward estimates. • Conventional wisdom that mother’s schooling has much larger impact than father’s schooling also misleading. • Results depend on context (e.g., returns to women’s schooling in labor markets, – see Behrman, et al. JPE 1999 for different results for India).

18. 2. Impact of Birthweight (Behrman & Rosenzweig REStat 2004) Many LBW babies (12.7 million per year). Many claims of negative effects on those that survive infancy. However available estimates do NOT identify effect of increasing nutrition in womb because of confounding effects of endowments and household responses to endowments. Simple idea: BW for MZ twins has shared genetic physical endowments (Ep), shared average nutrition (Nav) and twin-specific nutrition (Ntw) components: (6) BW = Ep + Nav + Ntw Twins method controls for E and Nav in estimates of impact of BW – therefore identifies effect of improved nutrition in womb.

19. Figure 1. Low Birthweight and Log Per-worker GDP Around the World

21. Implications • Better nutrition in womb twice as large impact on schooling and more than six times as large effect on wages than usual estimates. - consistent with negative correlation between earnings endowments and physical endowments. - increasing average BW of U.S. babies in bottom half of BW distribution to U.S. mean (~17 ounces) would increase lifetime earnings by 6%. - if India had US BW distribution, earnings up by 9%. • Better nutrition in womb strong effect on height, but no effect on obesity or birth weight of next generation

22. Cost of multiple births from fertility treatments - if twin rather than singleton, reduction in lifetime earnings of over 12%. • High cost of smoking while pregnant - mother who smokes one pack of cigarettes per day reduces lifetime earnings of her child by over 10%. • Recent studies for Guatemala find important long-run effects 30 years later on cognitive performance of experimental nutrition intervention when 6-24 months, second most vulnerable period for nutritional insults (Behrman, et al. 2003)

23. 3. Parental Wealth and Adult Children’s Welfare in Marriage (Behrman & Rosenzweig working paper 2003) • Many studies on how parental resources play important roles in human capital of children and some evidence on (relatively small) inter vivos gifts and bequests. • But collective household approach (Manser & Brown, IER1980; McElroy & Horney, IER 1981; Chiappori Econ 1988, JPE1992) suggests parental resources of marital partners may have important effects on welfare of adult children through altering distribution of resources within marriage by changing partner-specific opportunities outside of marriage. If so, studies of effects of parental wealth that focus exclusively on human capital development and financial transfers may understate lifetime advantages for persons born into wealthy households.

24. Use data we collected on parent and parent-in-law characteristics, transfers and bequests and visits by couples with parents and in-laws to assess within the context of a collective household framework whether and how variations in resources across parents and in-laws affect individuals’ welfare within marriage. Focus on allocation of time to visiting in-laws and parents because visits an important component of time for most households, with almost no households with none (<2%) and median number of visits with parents and in-laws per household 37 per year.

25. Critical Assumptions for Framework • Both marital partners receive utility (welfare) from own consumption and from visiting own parents and from visiting in-laws (but more on average from visiting own parents). • Both spouses participate in visits. • Full income constraint for resources and time. • Bargaining position depends on options outside of marriage that in turns depends on own parents’ wealth. • Resources bought into marriage are shared equally given Common Property Laws in most U.S. states.

26. Implications for demands for visits to husband’s parents: • More visits the greater husband’s parents’ wealth (since this wealth affects expected support for husband if marriage dissolves). • Less visits the greater wife’s parents’ wealth. • More visits the closer are husband’s parents. • Less visits the closer are wife’s parents. • Less visits the higher are the incomes of husband and wife (higher opportunity cost of time) with equal effects (since income pooled within marriage). • Previous resources received from husband’s and from wife’s parents have equal effects (since pooled). • Effect of couple endowment (e.g., preferences for spending time with relatives).

27. Similar considerations for visits to wife’s parents. • Then can control for endowments, as above, by considering visits to husband’s parents minus visits to wife’s parents. This difference is predicted to be greater: • the more the wealth of the husband’s parents exceeds the wealth of the wife’s parents • the closer are the husband’s parents relative to the wife’s parents But predicted to be no effect of: • husband’s income, wife’s income or the income difference • previous transfers received from husband’s parents, wife’s parents or the difference in such transfers Estimates consistent with predictions, but not with alternatives.

28. Implications of Study Long recognized that parental wealth has economic advantages for children as they become adults (e.g., more schooling, higher quality schooling, connections that lead to better and higher-paying jobs, and better prospects of receiving larger net financial transfers in the forms of inter vivos gifts and bequests). Our estimates indicate that: • parental wealth confers additional advantage, in terms of allocations within marriage, that would not be eliminated by the alleviation of borrowing constraints or by restrictions on bequests. • outside options affect bargaining within households so policies that affect such options affect intrahousehold allocations and probabilities of marital breakup (AFDC in US, PROGRESA in Mexico).

29. gains from marrying someone from wealthy family less than might appear because (a) risk of break-up before bequests received and (b) weaker bargaining position while married. • pooling of resources received within marriage (Common Property Laws). • inconsistent with strategic bargaining between parents and children because (a) equal bequests, (b) favor non-married and lower income children with transfers, and (c) no cross-sibling effects. • studies of intrahousehold allocations (e.g., to children) that are inattentive to outside options (family, legal) are likely to provide incomplete results.

30. Overall Conclusions • Strong associations between parental and child economic success strong if incorporate longer-run considerations. • To understand causal effects of parents on children need to incorporate endowments (e.g., genetics) even though most studies have not. As a result standard studies have been misleading: • Overestimating impact of parental schooling on child schooling – particularly mother’s schooling which in US may have inverse effect. • Underestimating impact of early nutrition on schooling and earnings (and thus possible negative effects of maternal smoking while pregnant and fertility treatments that lead to multiple births). • Overestimating impact of early nutrition on obesity and on birth weights of next generation.

31. 3. While there has been been considerable emphasis on various ways through which parental wealth confers advantages to children particularly through schooling and transfers, there may be other advantages that have been under-recognized – such as strengthening the bargaining position of adult children within the family and increasing their share of household resources.