IZA DP No. 9440: Drought of Opportunities: Contemporaneous and Long-Term Impacts of Rainfall Shocks on Human Capital
Higher wages are generally thought to increase human capital production, particularly in the developing world. We introduce a simple model of human capital production in which investments and time allocation differ by age. Using data on test scores and schooling from rural India, we show that higher wages increase human capital investment in early life (in utero to age 2) but decrease human capital from ages 5-16. Positive rainfall shocks increase wages by 2% and decrease math test scores by 2-5% of a standard deviation, school attendance by 2 percentage points, and the probability that a child is enrolled in school by 1 percentage point. These results are long-lasting; adults complete 0.2 fewer total years of schooling for each year of exposure to a positive rainfall shock from ages 11-13. We show that children are switching out of school enrollment into productive work when rainfall is higher. These results suggest that the opportunity cost of schooling, even for fairly young children, is an important factor in determining overall human capital investment.