Ronni Pavan (University of Rochester)

Local Distortions in Parental Beliefs over Child Skill
(Joint with Josh Kinsler, University of Georgia)

Abstract: Parental beliefs over child skill have been shown to have a significant impact on investment behavior. In this paper, we examine how parental beliefs form and evolve, focusing on the role of the local environment. Using data from the ECLS-K, we first show that parental beliefs about a child's skill relative to children of the same age is distorted by a child's skill relative to children in the same school. Parents of children attending schools with low (high) average skills tend to believe their child is higher (lower) in the overall skill distribution than they actually are. Motivated by our descriptive findings, we develop and estimate a formal model of parental learning that is capable of rationalizing these patterns. While we find that parents receive useful information, they tend to misinterpret signals of child and school skill, generating local belief distortions. Using the model, we then investigate how parental beliefs would change if the information set and/or parent perceptions were altered. Finally, we relate parental beliefs and investment, providing insight on how local distortions may impact the skill distribution.