Human capital investment by the poor: Informing policy with laboratory experiments

Abstract

participants at various seminars for their helpful comments and suggestions. Special thanks to Nathalie ViennotBriot for her programming expertise and Jean-François Houde for his assistance in conducting the experimental sessions. Referees' comments were extremely useful in revising the paper. This work was funded under a contract through the Social Research and Demonstration Corporation from Human Resources Development Canada, Applied Research Branch. Any remaining errors are the sole responsibility of the authors. ** Corresponding Author: 2020 University Street, suite 2500, Montréal (QC) H3A 2A5. AbstractThe purpose of the study is to better understand human capital investment decisions of the working poor, and to collect information that can be used to design a policy to induce the poor to invest in human capital. We use laboratory experimental methodology to elicit the preferences and observe the choices of the target population of a proposed government policy. We recruited 256 subjects in Montreal, Canada; 72 percent had income below 120 percent of the Canadian poverty level. The combination of survey measures and actual decisions allows us to better understand individual heterogeneity in responses to different subsidy levels. In particular, participants chose between various cash alternatives and educational subsidies, for themselves and for a family member, allowing for the construction of two measures of willingness to invest in education. Two behavioral characteristics, patience and attitude towards risk, are key to understanding the determinants of educational investment for the low-income individuals in this experiment. The decision to save for a family member's education is somewhat different from that of investing in one's own education. Patient participants were more likely to save for a family member's education, but in contrast to investing in one's own education, a subject's attitude towards risk played no role. Keywords:Intertemporal choice, field experiments, risk attitudes, working poor. JEL Classification: C93 -Laboratory Experiments, D91 -Intertemporal and InvestmentConsumer Choice, D81 -Criteria for Decision-Making under Risk and Uncertainty 3 IntroductionReturns to investment in human capital have been high in the last half of the 20 th century, but at the bottom of the income distribution, the decision to invest in education beyond high school is still seen as complex and risky (Chen, 2002). To the educated, investment in education seems the obvious and only way to escape poverty, yet the poor avoid such investments. We report the results of a study designed to better understand human capital decisions by the poor.A secondary purpose of the study is to collect information that could be used to design a policy to encourage the poor to save and invest in human capital. We use laboratory experimental methodology to measure the preferences and choices of a sample of low-income subjects in Montreal, Canada. Note that our purpose is not program evaluation; in particular, we do not attempt to...

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