Parent–child bargaining, parental transfers, and the post-secondary education decision

Abstract

Schooling decisions are often modelled within a unitary preference framework. In this article, an alternative to the unitary preference model is proposed in which parents and child have conflicting preferences over parental transfers and the level of post-secondary schooling and participate in cooperative bargaining as a means of resolving this conflict. Comparisons of the implications of the bargaining and unitary preference models motivate tests of parental altruism and income pooling. To test these hypotheses, reduced form transfer and schooling equations are estimated using data from the High School and Beyond Surveys. The evidence suggests that the unitary preference model be rejected.

Acknowledgements

The author thanks Brian Boulier, Shelly Lundberg, Donald Parsons, David Ribar, Anthony Yezer, and seminar participants at the Center for Economic Studies, U.S. Bureau of the Census, the Labor Studies Workshop at The George Washington University, the Society of Government Economists’ Labor and Human Resources Brown Bag, and the Initiative in Population Research at The Ohio State University for their invaluable comments and suggestions.

Notes

¹Kalenkoski (2005) provides evidence that a substantial percentage of parents contribute less than their EPC.

² There are several studies that allow disagreement between parents to affect their children's human capital. For example, see Thomas (1994).

³ Post-secondary schooling has aspects of both an investment good and a consumption good as both gains in future earnings and current social or psychic benefits may be derived from it. This model assumes that utility is a direct function of s in order to abstract from the particular mechanisms by which schooling affects utility. See Collins and Snell (2000) for a discussion of school attributes of interest to parents choosing secondary schools for their children in the UK.

⁴ This utility function nests a more restricted specification, W(c ^p, U ^c(c ^c, s)), which would explicitly allow the child's preferences to enter the parents’ utility function.

⁵ A child-as-decision maker unitary preference model in which the child is independent and selfish would ignore parents’ consumption, c ^p, and treat parental transfers as an exogenous source of income. The parent-as-decision maker unitary preference model is discussed here because it treats transfers as endogenous, facilitating comparisons between the unitary preference and the bargaining framework.

⁶ The unitary preference model has also been justified by assuming the household head has dictatorial control over all household decisions.

⁷ This is a commonly-made assumption that motivates Becker's (1974) Rotten Kid Theorem.

⁸ Again, however, noncooperative models of family behaviour have been proposed (see Lundberg and Pollak, 1994).

⁹Seaton (2001) investigates conditions under which a type of model similar to Cournot oligopoly would be more appropriate than a bargaining model in describing family behaviour.

¹⁰Recall that Z includes X and that is why Z is given the ‘hat’ designation.

¹¹Estimated SEs are based on 200 replications.

¹² While data from three survey years are used, the analysis is a static one. A longitudinal analysis cannot be performed due to a lack of key data.

¹³ Students choosing other programmes, e.g. a 1-year vocational programme, are excluded. An alternative way to define this programme choice variable allows it to take on a value of 1 if the child attends a 4-year programme and a value of 0 if the child attends any other post-secondary programme. Defining the initial programme choice variable in this way does not materially affect the results.

¹⁴ It is important to note that there are alternative interpretations of the predicted ‘price’ variable. If school quality is thought to be constant, or adequately captured by the observable demographic characteristics included in the predicting equation, then this predicted price can be treated as a true price variable. If it is believed that higher tuition and fees are associated with higher quality schooling, and that the demographic characteristics included in the price regression do not adequately control for quality, then this variable is better thought of as a predicted expenditure. While the word ‘price’ is used in this discussion, it should be kept in mind that this may actually represent schooling expenditure.

¹⁵ The estimate of the correlation between the error terms in the receipt and enrolment probits, , is not statistically significant, suggesting that the two probit equations could have been estimated separately.

¹⁶ A similar caution to that regarding the validity of the high school dummies as instruments also applies here.

¹⁷ In specification (2), to bias a true total reduction of $10 000 to the level of $2229 that is estimated, the measurement error variance of parents’ income would have to account for 93% of the total variance of parents’ income.