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Child Skill Production: Accounting for Parental and Market-Based Time and Goods Investments

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Parents spend their own time and money at home investing in their children's human capital. Many also make substantial investments through market-based child care services. A wide range of government policies affect these investment decisions. The impact of these policies on children’s welfare and development  depends on how families respond by adjusting their investment profiles across inputs within periods and over time.

The literature estimating human capital production functions for children typically reduces investment each period to a single composite input or makes assumptions about the substitutability between investment inputs. In this paper, we consider a technology that jointly characterizes patterns of substitution for time and purchased goods/services at home and for child care purchased from the market.

Our estimates suggest complementarity between parental time and home goods/services inputs as well as between these family-based inputs and market-based child care. Accounting for the degree of input complementarity implied by our estimates is important for understanding cross-sectional patterns in the data and responses to changes in market prices and policies.