SMU SOE Seminar Series (March 26, 2025): A Dynamic Analysis of Parental Beliefs and Investments

TOPIC:

ABSTRACT

This paper quantifies the role of parental beliefs about the skill level of children in explaining the SES skill gap. To achieve this, I estimate a dynamic model of parent investments with belief updating. The model is disciplined with longitudinal data on parental beliefs, investments and children’s skills. The model has the following features. Parents do not observe the skill level of their child. Instead, they hold a belief about the skill. Parents make investments which influence the evolution of the unobserved skill. They also learn about the skill of the child - they receive signals (noisy information about child skill) which they use to update their belief. The model features feedback between beliefs and investments. The beliefs which parents hold will affect their investment choices. Their investment choices will affect their belief in the following period, and so on. 

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