Causal effects of family income on educational investment and child outcomes: Evidence from a policy reform in Japan

The Child Allowance Policy (CAP) in Japan, a nationwide cash transfer program for families with children, was designed to increase household expenditures toward children. Using unforeseen changes in the CAP that occurred due to the electoral results as a source of exogenous variation in income in the early 2010s, this paper examines the causal impact of family income on households’ private educational expenditures and child outcomes in the short-run, based on a longitudinal parent-child survey. The ordinary least squares (OLS) and first-differenced (FD) results show that family income is in most cases positively correlated with child's cognitive outcomes, and, to a lesser extent, with families’ educational expenditure on their children. Based on the FD instrumental variable (FD-IV) estimation, using unexpected changes in CAP payments as an instrument, we find positive income effects on educational expenditure in the short-run. However, we did not find statistically significant impacts on children's cognitive outcomes.