Substitution E¤ects in Parental Investments

Parents have to decide howmuch and how to invest in each of their children. Becker proposed that parents choose among di¤erent types of investments for each child e ¢ ciently and that they also choose investments to equalize wealth across their children. Existing empirical tests of this hypothesis using across family variations in investments su¤er from unobserved family heterogeneity. Family \u85xed e¤ects methods have been suggested and used, although their interpretation has not been well articulated. The contributions of this paper are two fold. First, we provide an empirical frame-work to study substitution e¤ects in parental investments in the presence of un-observed family heterogeneity, unequal parental valuations of their investments across children, and unobserved di¤erences in child abilities. Second, we imple-ment this framework using a unique data set on parental investments in education and marital transfers in rural China. Our household \u85xed e¤ect regressions show that marital transfer is negativel