An incentive model of the effect of parental income on children

Economists explain the positive relationship between parental income and ch ildren's outcomes using an investment model. Building on work in psychology and sociology, this paper emphasizes the importance of child-rearing pract ices, which vary with income. I argue that parents' ability to mold their c hildren's behavior through pecuniary incentives is limited at low incomes, leading to lower outcomes and increased reliance on nonpecuniary mechanisms such as corporal punishment. My model generates a positive relationship be tween parental income and children's outcomes especially at low incomes and endogenously produces a relationship between parental income and child-rea ring practices. Empirical work confirms these implications.