Human Capital Diversification among Siblings

Helene Bie Lilleør, Rockwool Foundation Research Unit

In the child labor literature, liquidity constraints are the dominating explanation for low schooling in LDCs. However, letting children work is also consistent with a diversi?cation strategy among children under no liquidity constraints. A portfolio model yields testable implications allowing me to distinguish empirically between liquidity constraints and other reasons for human capital diversi?cation among children, such as spreading risk or decreasing returns to farm labor. Consistent with social norms in rural Tanzania, the empirical ?ndings support a portfolio decision among sons, and not among daughters. This suggests that conditional transfer policies to increase schooling may have limited success.