Income Risk and Education Investment: Evidence from India

How does income risk affect education investment decisions in India? Theoretically, the relationship is ambiguous: Higher income risk may induce parents to accumulate greater precautionary savings, reducing schooling investment. On the other hand, forward-looking households may choose to increase schooling investment so children can diversify from agriculture and earn higher, less risky incomes in the longer run. Empirical studies so far have yielded mixed results. I provide new evidence on this question by exploiting fluctuations in mean-preserving temperature variability to identify the effects of income risk on short-run education choices. Using a two-way fixed effects framework, I find that greater income risk is associated with increases in primary and middle school enrolment in the village. On the intensive margin, I observe improvements in education achievement due to greater income uncertainty, though these effects are driven entirely by improvements in outcomes for boys. This is suggestive of a pattern of son-preference observed in the literature before. Broadly, results are most consistent with the income diversification channel being dominant in this context, although in the poorest villages I observe a net negative impact of income risk on schooling outcomes. As such, alternative mechanisms do not seem to be driving the results. Evidence from this paper indicates a need for better insurance mechanisms to protect vulnerable groups from the adverse effects of income risk on human capital accumulation.