Start what you finish! Ex ante risk and schooling investments in the presence of dynamic complementarities

We study the relationship between risk and schooling investment in a low income setting, with a particularfocus on possible ex ante effects. We first present a model that shows that such effects can arise ifthe human capital production function exhibits dynamic complementarity and parental preferencesfor human capital are not too concave. We then estimate the key parameters of the model using multiplerounds of panel data from rural India that contain, in each round, three seasons of time allocation foreach sampled child. These estimates suggest an elasticity of schooling investments with respect torisk of -0.09 in this context. We then use cross-round differences in village-level irrigation interactedwith rainfall variability to estimate the relationship between income risk and school time. Using thisvariation, we find an estimated elasticity of study time with respect to risk between -0.05 and -0.04.Finally, we simulate the effects of an implicit social insurance program, modeled after the NationalRural Employment Guarantee Scheme (NREGS). Our results suggest that the risk-reducing effectof the NREGS may offset adverse effects on child education that were evident during the NREGSphase-in due to rising wages