American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Efficient Child Care Subsidies
American Economic Review
vol. 110,
no. 1, January 2020
(pp. 162–99)
Abstract
We study the design of child care subsidies in an optimal welfare problem with heterogeneous private market productivities. The optimal subsidy schedule is qualitatively similar to the existing US scheme. Efficiency mandates a subsidy on formal child care costs, with higher subsidies paid to lower income earners and a kink as a function of child care expenditure. Marginal labor income tax rates are set lower than the labor wedges, with the potential to generate negative marginal tax rates. We calibrate our simple model to features of the US labor market and focus on single mothers with children aged below 6. The optimal program provides stronger participation but milder intensive margin incentives for low-income earners with subsidy rates starting very high and decreasing with income more steeply than those in the United States.Citation
Ho, Christine, and Nicola Pavoni. 2020. "Efficient Child Care Subsidies." American Economic Review, 110 (1): 162–99. DOI: 10.1257/aer.20170581Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- J13 Fertility; Family Planning; Child Care; Children; Youth
- J16 Economics of Gender; Non-labor Discrimination
- J32 Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions