The Economic Rationale for Investing in Children: A Focus on Child Care. Summary of the Main Arguments for Public Investment in Quality Child Care


Throughout the day, speakers and conference participants drew on the arguments for public investments in other markets to discuss the relevance of various arguments for public investment in quality child care. For the most part, conference participants agreed on the main types of failures in the child care market that could serve as arguments for government intervention, although they did not always agree on the relative strength of the arguments. The following sections summarize the main failures that participants identified in the child care market and present other economic arguments for government intervention.

Externalities. Quality child care may produce some benefits that accrue not only to parents and children, but also to society. When making child care decisions, however, individual parents may take into account only the benefits of quality care that accrue to the family and child. For example, participants cited such possible societal benefits as increased school readiness, lower school dropout rates, reduced crime, reduced substance abuse, and increased productivity as parents have fewer child-care-related absences from work.

Information Problems. Participants identified two failures in the child care market associated with information problems: (1) lack of information about the quality, cost, and availability of care; and (2) asymmetrical information among parents and child care providers. Because child care is offered by many small regulated and unregulated child care providers, parents have difficulty obtaining information about the availability of care and the relative quality and cost of available child care arrangements. In many communities, child care resource and referral agencies offer information about the availability and cost of regulated child care providers, but usually do not provide information about quality. Moreover, because quality is defined along multiple dimensions and is difficult to assess, parents do not know how to evaluate information that they are able to obtain about quality.

Furthermore, information about the quality of child care arrangements may not be equally available to parents and child care providers. The difficulties parents face in defining quality and identifying quality child care arrangements may create a disincentive for providers to reveal the quality of the care they offer. Because parents cannot identify quality, it is not reflected in the price of care. Thus, although the quality of available arrangements may vary, the price of care across these arrangements remains close to the mean price.

Imperfect Capital Markets and Liquidity Constraints. Low-income parents face severe income constraints. They cannot afford to purchase quality child care and many other goods that would benefit their children, nor can they borrow against a child's future income to pay for quality child care. Moreover, child care needs often occur when parents are young, and at one of the lowest points in their adult income streams. Some participants asserted that this argument was not sufficient to justify public investment in child care. They argued that, if the problem is poverty, the government should supplement parents' income, rather than provide goods in kind, and allow parents to make their own consumption choices. Others argued that, because child care consumes such a substantial portion of poor families' budgets  more than health care or college tuition  funding it is a good way to improve poor families' incomes.

Parents as Imperfect Agents.  Related to market failures associated with imperfect information is the fact that parents act as agents for their children in the child care market. When the buyer of a good is not also the consumer, that buyer may not make decisions that fully reflect the interests of the consumer. Young children cannot make their positions on child care known, and parents may not take into account the potential long-term ramifications of their decisions on children's well-being. For example, parents may underestimate the benefits of high-quality child care that could accrue to the child later in life  either because they may discount the future too much or because they may not be aware of the potential long-term benefits of quality child care. In some cases, parents may not give enough weight to the best interests of their child when making child care decisions. For example, some parents may value convenience over quality  choosing to purchase child care that is closer to the parent's workplace rather than quality child care that is not conveniently located.(4)

Equality of Opportunity.  Children in various socioeconomic groups do not have equal access to quality child care, because low-income parents often do not have the financial resources to purchase quality care. If high-quality child care can improve cognitive ability, school readiness, and social development, and if maximizing these outcomes for all children is an important goal, then low-income families should have the same opportunity as higher-income families to access quality child care. In that case, government intervention in the child care market through subsidies or direct provision of care may be necessary to ensure equal access to quality child care across socioeconomic groups. Some participants also argued that government interventions aimed at reducing inequality of opportunity may be more potent when they occur during the children's early years than when they occur later in life (through such interventions as remedial education or adult employment and training programs).

Child Care as a Merit Good.  Some participants argued that quality child care is a merit good. In other words, it is a good (such as elementary education or seat belts) that the government should compel people to consume in certain circumstances for their own good. Through welfare reform, the government and the public have made a value judgment that work is good for low-income parents. Thus, society has already made an implicit judgment that children in low-income families should attend child care (while their parents work) rather than stay at home with their parents. Some participants thought that, if child care is a merit good that enables low-income parents to work, mandating quality child care for those children would be a natural extension of that argument. Others asserted that, because of society's ambivalence about the value of child care and arguments for parental choice, it would be difficult to make a case that government should mandate the type of care that children should receive.