Economic Structural Change and Family Investments in Children

The structures of production and organization differ across rural and urban sectors. In agriculture, family members engage in joint production and collective decision making, while in industry they participate in wage employment in the labor market. In this paper we present a model that incorporates the asymmetry between the rural and urban sectors and shows that this asymmetry leads to different family behaviors: Urban parents choose lower fertility, make more educational investment in children, and, in particular, invest more equally in each child's education than their rural counterparts. These behavioral differences exist even if the two types of families have otherwise equal economic conditions, such as preferences, parental incomes, child endowments, and costs of education and child rearing. In a dynamic version of the model, we show that economic development leads to higher schooling attainment, lower fertility, and a more equal distribution of sibling education, as rural families respond to urban employment opportunities and as the percentage of rural population declines over time. These analytical results are consistent with observed family behaviors covering six decades of rapid development in Taiwan.