Cecilia Garcia-Peñalosa: cecilia.garcia-penalosa[at]univ-amu.fr
In this paper we incorporate parental beliefs about returns to parental time investments in the estimation of a human capital production function. We proceed in three steps. First, we collect data on parental beliefs about returns to parental time investments using hypothetical scenarios. We find that beliefs about returns to investments are a significant predictor of parental investments. Second, using the British Cohort Study we estimate a dynamic latent factor model of cognitive and noncognitive skill production and document how these skills map into outcomes over the lifecycle. Third, we combine the estimates from the two previous steps to simulate the effect of a shift in beliefs on investments and future child outcomes. We find that increasing beliefs about the returns to investments for parents with low perceived returns has large payoffs in terms of the future earnings of a child. The gains from increasing beliefs are greatest for children with parents at the bottom of the income distribution.