College as a Commitment Device: Parental Altruism and the Samaritan's Dilemma

Abstract

Why do parents invest so heavily in their children’s college education? I argue that college acts as a commitment device against a Samaritan’s dilemma: anticipating parental support, children under-save and over-consume, and college mitigates this by permanently raising the child’s income, shrinking the set of states in which parents optimally transfer. Consistent with this mechanism, in matched parent-child data parents of college children consume more and transfer less often (though in larger amounts when they do), with the consumption difference larger than the fall in realized transfers—a pattern in line with the precautionary resources parents release when they no longer need to stand ready to support the child. I formalize the mechanism in a continuous-time dynastic model with endogenous college choice, estimated by the simulated method of moments, and use it to decompose the effect of the lack of commitment on enrollment into two opposing forces: anticipated support during college subsidizes attendance, while anticipated lifetime support cushions the child who forgoes college and depresses it. The balance of these forces—and hence the direction of the enrollment distortion—varies across the joint distribution of ability and parental wealth. The welfare consequences of removing the friction—and of policies such as free college—depend on whether parents can commit, since the same transfers that distort the college decision also insure children against income risk.

Agustin Diaz Casanueva

Economist

I study how households make economic decisions about consumption, fertility, and labor supply in response to shocks and policy changes.