Incomes and earnings are highly volatile in developing countries and credit and insurance markets are inadequately developed. At the same time schooling attainment and investment are low. This paper analyzes effects of household income risk on schooling investment in Bihar, India. Bihar is one of the poorest states in India. Schooling in Bihar faces several challenges including low investment and learning outcomes. This paper utilizes a unique primary survey data eliciting schooling indicators and subjective income distribution from households in twelve villages in Bihar. The survey contained a module designed to elicit information on the cumulative probability distribution of future income of households. Using this information, household-specific variance of future income is derived, which is used as an indicator of income risk. This is one of the first papers to use subjective income distribution data to analyze the effects income risks on schooling in a developing country. Data shows that there is a significant bias against female children in schooling investment in Bihar. Regression analysis suggests that this gender bias in schooling investment can partly be due to income risks faced by households. Results show that household income risk has a significant negative effect on schooling expenditure and time-spent by children on tuition and homework, particularly of female children in Bihar. It has significantly larger negative effect on schooling expenditure of low income households and time-spent by their children on tuition and homework relative to higher income households. Overall these findings suggest that income risk faced by poorer households is an important reason for the persistence of low educational achievement and outcomes in Bihar, particularly for female children. Government policies which reduce income risks such as provision of health insurance, unemployment insurance, old age pension scheme and easier availability of consumer credit targeted towards poor households, are likely to have significant positive effect on schooling. Microfinance institutions and NGOs can play an important role in the provision of insurance and labor market information. Public investment in irrigation and better weather information can reduce income risk and encourage schooling investment.


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