Fiscal externalities and underinvestment in early-life human capital: Optimal policy instruments for a developing country

Abstract

We study policy instruments to correct inefficiently low investment in maternal nutrition in India, where one-fifth of all births occur. We focus on fiscal externalities: healthier babies become more productive adults, who pay more tax. However, parents do not internalize this externality, which, combined with other distortions, results in mothers weighing too little during pregnancy. We calibrate the first sufficient-statistics policy model for the quantitatively important case of fiscal externalities and maternal nutrition in developing countries. The optimal subsidy is large. Yet, welfare gains are even greater from public investment in state capacity to monitor nutrition, enabling targetted incentives.