As credit and insurance markets are imperfect, and given that intra-family transfers, and the way a child uses her time outside school hours, are private information, the second-best policy makes school enrollment compulsory, forces overt child labour below its efficient level (if positive), and uses a combination of need and merit based grants, financed by earmarked taxes, to relax credit constraints, redistribute and insure. Existing conditional cash transfer schemes can be made to approximate the second-best policy by incorporating these principles in some measure.