Why do parents underinvest in their children's education? Evidence from China

In this paper we study whether the presence of financial constraints that limit parents’ ability to borrow and the existence of educational fixed costs can explain the underinvestment of parents in their children's human capital. We first incorporate these two potential mechanisms into the theoretical model of Raut and Tran (2005) and then we test their empirical relevance using data from the China Health and Retirement Longitudinal Study (CHARLS). Our results support the idea that especially fixed costs play an important role in explaining human capital underinvestment.