PARENTAL INVESTMENT, COGNITIVE AND NON-COGNITIVE SKILLS FORMATION AND ECONOMIC GROWTH

Abstract

Parenting time helps a child to develop non-cognitive skills, whereas material investment in children along with the state schooling both help developing cognitive
skills. Both cognitive and non-cognitive skills contribute to the formation of human capital, translating into labour productivity of an adult worker. The numerical simulations show that following results: (i) parents' stronger preference to material investment in children relative than time investment increases the rates of growth, as well as the higher relative importance of cognitive skills in human capital. However, the higher importance of parenting time decreases the growth rates. (ii) At the certain social weight, physical and human capital may under- or over-accumulate in the same or opposite directions. Laissez-faire economy does coincides with social optimum. (iii) Labour income taxation and subsidies in material investment are positive to implement the effcient allocations. Capital income is taxed or subsidized depending on the relative preference of parenting time and the agent's patience. (iv) Policy simulations reveal that higher labour and capital income tax rates both increases the growth rates. In contrast, public subsidy in material investment has counter effect to the growth rates. In the benchmark calibration, the best welfare-maximizing policy reformation is an increase in government spending on education funded by higher labour income tax rates.