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CEE/Education and skills discussion paper

The Timing of Parental Income and Child Outcomes: The Role of Permanent and Transitory Shocks


How do shocks to parental income drive adolescent human capital, including years of schooling, high school dropout, university attendance, IQ and health? A structural model decomposes household shocks into permanent and transitory components, then the effect of shocks at age 1-16 is estimated for 600,000 Norwegian children. The effect of permanent shocks declines - and of transitory shocks is small and constant across child age, suggesting parents optimise similarly to consumption. However there is a lower effect of transitory shocks for liquidity constrained parents. An interpretation is that these parents use income shocks for essential consumption rather than investment.


Emma Tominey

October 2010     Paper Number CEEDP0120

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This CEE/Education and skills discussion paper is published under the centre's Education and skills programme, Education and skills programme.