Parental investments in early childhood have been shown to have a large impact on skill acquisition. In this paper, we examine how beliefs about a child's relative skill influences investment and how these beliefs are determined. Using data from the ECLS-K, we first show that parental beliefs about a child's skill relative to children of the same age is distorted by a child's skill relative to children in the same school. In other words, parents of children attending schools with high (low) average skills tend to believe their child is lower (higher) in the overall skill distribution. We then show that beliefs about a child's skill relative to children of the same age affects parental investments such as helping with homework or hiring a tutor. Thus, parents are making important investment decisions using inaccurate information. Building off our descriptive findings, we develop a model of parental investment that incorporates uncertainty about the average skill level of similarly aged children. We estimate the model using indirect inference and perform a set of counterfactuals where parents are fully informed about the average skill level in the population. We find that investment and achievement rise by a considerable amount for students at the bottom of the skill distribution. The mechanism behind this result is that parents of children in relatively low achieving schools revise upward their beliefs about the average child in the population, inducing an investment response.
J13: Fertility; Family Planning; Child Care; Children; Youth
D10: Household Behavior: General
J24: Human Capital; Skills; Occupational Choice; Labor Productivity