The Impact of Regulations on the Supply and Quality of Care in Child Care Markets

Abstract

We examine the impact of state child care regulations on the supply and quality of care in child care markets. We exploit panel data on both individual establishments and local markets to control for state, time, and, where possible, establishment-specific fixed effects to mitigate the potential bias due to policy endogeneity. We find that the imposition of regulations reduces the number of center-based child care establishments, especially in lower income markets. However, such regulations increase the quality of services provided, especially in higher income areas. Thus, there are winners and losers from the regulation of child care services.

Supply and quality choices in private child care markets: Evidence from São Paulo

“…The current paper complements this strand of work by providing direct evidence on the role of local income in shaping providers' supply and quality choices in a market that remains largely unregulated. Consistently with the findings of Hotz and Xiao (2011), the evidence we provide suggests that market-driven heterogeneity in the quality of provision across space is an important consideration for the regulation of child care markets in developing countries.…”

“…We have not pursued this path as in the data it is common to observe centers with similar brand operating in different city districts. For the US, Hotz and Xiao (2011) are able to identify precisely child care centers affiliated with a chain, and report that a chain may have as many as 1000 establishments. Notice, however, that all results would prevail if we were to assume that there exists a continuum of local providers in each district, and that each provider decides whether or not to enter the corresponding district.…”

“…(5e)), low-income households might be "priced out" from the market and switch to informal or home-based sources of care that would probably spread in response to the policy intervention. 30 In fact, Hotz and Xiao (2011) find no evidence that formal child care centers that remain active increase their size by hiring more workers in response to child care regulations, and show that some of the children who are crowded out of child care centers as a result of more stringent minimum standards end up in family day care homes. On the other hand, if strict enforcement precludes the emergence of informal child care arrangements in response to the imposition of minimum quality standards, the desirability, quality and safety of alternative sources of care need to be carefully evaluated -notably care given by grandparents, older siblings, or increased maternal care through reductions in labor supply.…”

“…Using panel data for the U.S., Hotz and Xiao (2011) report two main findings: (1) more stringent regulations on establishment inputs reduce the number of child care centers, especially in lower-income markets; and (2) such regulations increase the quality of care, especially in higher-income locations. Hence they conclude that there are winners and losers from the regulation of child care services.…”

Regulation and the Cost of Child Care

“…16 If one provider is allowed to care for a larger number of children, that provider can earn a 14 Hotz and Xiao (2011) do not look at the effects of regulation on direct quality measures. 15 Being placed in lower-quality care settings can have significant detrimental effects on child development and learning outcomes, especially for children from lower-income households.…”