PhD Seminar -Rachel Tan UCL)

Abstract: This paper seeks to quantify the role of parental beliefs about child skill in explaining differences in parent investments, and therefore differences in children's human capital outcomes. Using longitudinal data on parental beliefs about child skill, I find evidence that parents may update their beliefs in response to new information. Furthermore, parental beliefs are related to parent investments, even after controlling for time-invariant unobservables specific to the family. Next, I introduce a model to connect parent belief updating, how beliefs influence investments and how investments influence child human capital. In the model, parents enter each period with a belief about the child’s true skill. They receive a signal (noisy measure of the unobserved true skill), which they use to update their belief. This belief will influence parents’ investments, which in turn affect the unobserved true skills of the child through a skill production technology. The unobserved skill influences the signal received and parental beliefs in the following period, and so on. In this way, there is feedback between beliefs and investments, and this allows me to study the dynamic impact of beliefs.

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