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.