Ability, Heterogeneity, and Parental Choices on Human Capital

Jin-tae Hwang and Sung-min Kim*

Abstract

This paper shows that when children’s ability is heterogeneous, a parent’s choices about educational expenditures and fertility follow a pooling equilibrium or a separating equilibrium. Which of the two equilibria will prevail depends on the probability of getting a high-ability child in human capital accumulation. Adopting the model of Acemoglu’s (1999), this paper presents that the outcome of the pooling choice in the pooling regime and the outcome of the separating choice in the separating regime make the growth rate of human capital higher than otherwise. In addition, as the probability of a high-ability child increases, the growth rate of human capital in the separating equilibrium exceeds that in the pooling equilibrium.

* Research Professor, Asiatic Research Institute, Korea University, 145, Anam-ro, Seongbuk-gu, Seoul, Korea, 136-701, Tel: +82-2-3290-5246, E-mail: java0215@gmail.com or sm0910@korea.ac.kr; Research fellow, Korea Insurance Research Institute, Seoul, Korea, E-mail: jt0813@kiri.or.kr